Facebook Earnings Preview: What Might Be Expected From Q3 Results?

After a series of strong earnings reports from Alphabet Inc GOOG GOOGL, Amazon.com, Inc. AMZN, Intel Corporation INTC and Microsoft Corporation MSFT last week that pushed their shares as well as broader indexes higher, the spotlight this week has shifted to some of the other major tech companies left to report. One of them taking the stage this week is Facebook Inc FB, which reports third-quarter earnings after market close on Wednesday, Nov. 1.

In the second quarter, FB reported advertising revenue grew 47% year-over-year to $9.16 billion and that approximately 87% of ad revenue in the quarter was from mobile ads. Despite declines in desktop usage, desktop revenue increased 17%, which management attributed to its efforts to limit ad blocking technologies. For the third quarter, Wall Street consensus is calling for ad revenue to grow 42% year-over-year to $9.71 billion.

User growth on its core platform was one of the factors that management acknowledged had contributed to revenue growth in the second quarter. Facebook’s daily active users increased 17% year-over-year to an average of 1.32 billion and monthly active users also increased 17% year-over-year to 2.01 billion. In addition to user growth, management cited a 24% increase in the average price per ad and a 19% increase in the number of ad impressions as positive factors that boosted revenue in the second quarter.

FB has repeatedly warned that ad revenue growth could be pressured starting in the second half of 2017 because it couldn’t maintain the pace that it had been increasing the number of ads it served up to people in its News Feed, which had been a significant revenue driver in the past. CFO David Wehner also warned on last quarter’s call that advertising impression growth may slow as the company focuses more on driving engagement through mobile video.

Outside of its core platforms Facebook and Instagram, the company said that it has started monetization efforts in Messenger and WhatsApp, both of which reportedly have over 1 billion users. At the end of the second quarter, CEO Mark Zuckerberg said the company was still in the early stages of the process and that he’d like to see them moving faster in this area.

On the expense side, management tightened its expected 2017 total GAAP expense growth to 40% to 45%, from a wider range of 40% to 50%, when it reported Q2 earnings. FB also said it expects its capital expenditures for 2017 to come in at the lower end of its previous guidance between $7 billion and $7.5 billion. 

FIGURE 1: FACEBOOK YTD PERFORMANCE. Facebook (FB) is charted above, compared to the S&P 500 (SPX) as the pink line and the Nasdaq Composite (COMP) as the teal line. So far this year, FB is up over 53% and hit a new all-time high ahead of earnings. Chart source: thinkorswim^® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Facebook Earnings and Options Trading Activity

For the third quarter, Facebook is expected to report earnings of $1.29 per share on revenue of $9.88 billion, up from $7.01 billion in the prior-year quarter, according to third-party consensus analyst estimates. Looking back over the past eight quarters, FB has beat on both the top and bottom-line.

The stock has climbed ahead of earnings and hit an all-time high of $180.80 in intraday trading today, but shares have dropped a little bit from there and are trading around $180. With the stock’s recent rise, shares are up more than 53% year-to-date, pushing the company’s market cap over $500 billion.

Around the upcoming earnings release, options traders have priced in about a 4.5% potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading at the November 3 expiration, calls have been active at the 180 and 185 strikes, while puts have seen heavier trading at the 170 and 180 strikes. Looking further out at the November 17 monthly expiration, most of the trading has been concentrated at the 180-strike, pretty much right at the money. As of this morning, the implied volatility is on the high end at the 91^st percentile. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

Tomorrow afternoon, Tesla Inc TSLA also releases its third-quarter earnings. And on Thursday, there’s another series of tech earnings with Alibaba Group Holding Ltd BABA reporting before the market opens and Apple Inc. AAPL and Activision Blizzard, Inc. ATVI reporting after the market closes. In addition to earnings, it’s also a busy week for economic data. The Federal Open Market Committee wraps up its meeting tomorrow, releasing a statement in the afternoon, and the Bureau of Labor Statistics’ Employment Situation for October comes out on Friday. If you have time, don’t forget to check out today’s market update to see what else is going on in the markets.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.