The Typical Bullish Backdrop Expected For Facebook

Ahead of Facebook Inc's FB first quarter results, Barclays said it expects the usual bullish backdrop going into the print.

The social networking platform is expected to release its first quarter results after the market close on May 3.

Analysts, on average, expect the company to report earnings of $1.12 per share, up from $0.77 per share last year. Revenues are estimated at $7.82 billion, up 45.20 percent.

Barclays said it is slightly above the consensus estimate for the first quarter, estimated adjusted EBITDA of $5 billion and GAAP operating income of $3.4 billion.

FB Can Deliver

Barclays thinks Facebook would deliver in the first quarter, given its belief that the consensus estimate is conservative. The firm believes 2017 could be another strong year, with Instagram revenue ramping and new Messaging revenue on-ramps potentially being established.

"Some of this is already reflected in the 25 percent-plus move up YTD, but we would continue to add to positions," the firm said in a note. 

Q1 Ad Revenues Beatable

Citing their checks, Barclays analysts Ross Sandler and Deepak Mathivanan said demand for core Facebook, especially Instagram, remains healthy in the first quarter. The analysts estimate ad revenues of $7.9 billion, ahead of the $7 billion consensus estimate.

The analysts also think the temporary issues at Alphabet Inc GOOGL's YouTube may bode well for a slightly better run rate for Facebook going into the second quarter.

"We have always believed that FB's 1Q ad revenue is subject to increased q/q downward seasonality, following a big uptick in 4Q from video (core FB & Instagram) & formats like retail DPA," the analysts said.

The analysts indicated the trend looks less pronounced this year, as the sequential trajectory in mobile was far less noticeable in the fourth quarter than in the prior years, with much of the upside coming from desktop.

Consequently, the analysts said the first quarter looks beatable despite the 200 basis point-headwind from leap year. With the first quarter being the third quarter of ad blocker work-around, the analysts think growth remains elevated.

Margins To Track In Line With Trend

Barclays expects the usual sequential decline in gross margin and operating margin in the first quarter, estimating the metrics to be 86.7 percent and 41.9 percent, respectively. The firm's checks revealed 25-35 percent growth in headcount in the headquarters and faster growth in other geographies. Accordingly, the firm expects the cadence to remain elevated, as in the fourth quarter.

Longer term, Barclays expects margins to steadily decline, given Facebook's stage of growth and lower margin revenue, although the consensus estimates show an upward trend in 2018.

Barclays has an Overweight rating on Facebook with a $154 price target.

Related Links:

Q1 Earnings Kick Off: Can Big Banks Reignite Sagging Rally In The Space?

3 Worries For Facebook: Fake News, Ads And Analytics