To say social networking giant Facebook (NASDAQ:FB) needs to report good quarterly numbers after Tuesday’s close would be a considerable understatement. Facebook desperately needs to show the world it was underselling itself a quarter ago. Last report’s slowing user growth and dire outlook sent FB stuck tumbling 19% — the largest single-day market-cap loss in history. Ahead of Facebook earnings, shares are down more than 30% since that ill-fated Q2 release.
Unfortunately, though Facebook — and now analysts — are working with numbers that may be meant to be beat, the actual numbers likely to be dished out still won’t be all that impressive on an absolute basis.
Facebook Is Hitting a Wall
Facebook’s growth in monthly users slowed to a crawl a quarter ago, as the company starts to run out of new people willing and able to join the networking platform. Monthly users were only up 1.5% during the second quarter. That was the slowest rate of user growth the company had ever seen.
It was a day most owners of Facebook stock knew was coming sooner or later. But, most of those investors were counting on later rather than sooner.
Perhaps worse, with the battle for online advertising dollars between FB, Twitter (NYSE:TWTR) and Snap (NYSE:SNAP) starting to heat up, CFO David Wehner cautioned that operating margins were likely to slide from 44% to the mid-30% range in the foreseeable future.
Even worse than that, user growth hit the strongest headwinds in markets where Facebook could least afford it.
Though revenue per user in the U.S. and Canada edged up from $19.38 in the second quarter of 2017 to $25.91 in Q2 this year, sequentially, revenue per user is stagnant and choppy. And actual user growth is non-existent, with Facebook reporting 241 million monthly users for that market in Q2 — the same as Q1’s report. In Europe, the user headcount fell from 282 million in Q1 to 279 million as of the second quarter, with the company conceding that the EU’s new GDPR (General Data Protection Regulation) rules turned some existing users off.
Needless to say, Facebook earnings have a lot to prove. But for better or worse, the bar’s set relatively low.
Facebook Earnings Preview
For the quarter ending in September, analysts are calling for a profit of $1.47 per share of Facebook stock on sales of $13.8 billion. That top line would be a 33.3% improvement on the year-ago top line of $10.3 billion. But true to Wehner’s warning, that per-share profit figure would be 7% less than Q3-2017’s earnings of $1.59.
Neither number would be particularly thrilling in comparison to the second quarter’s absolute results either. Facebook earned $1.73 per share of FB stock in Q2, topping estimates of $1.71 and leaving the year-earlier profit of $1.32 in the dust. Sales-wise, the second quarter tally of $13.2 billion missed the $13.4 billion the pros had been modeling, though it was still well up from the Q2-2017 figure of $9.3 billion.
Still, the projected figures jibe with Wehner’s caution from Q2’s Facebook earnings call to “expect our revenue growth rates to decline by high single-digit percentages from prior quarters sequentially in both Q3 and Q4.”
Again, the company could have simply been sandbagging itself. Or, Q2 could have been just a one-time penance paid for the Cambridge Analytica scandal. Or, it could be a combination of both.
Whatever the case, it’s difficult not to think something fundamentally big hasn’t changed.
Bottom Line for Facebook Earnings
Current and prospective owners of Facebook stock have much to think about before Tuesday evening’s report. There’s still growth potential out there, but it doesn’t look or feel like high-quality, profitable growth. For the first time ever, the social networking giant appears forced to make tough choices.
HubSpot’s Vice President of Marketing Jon Dick explained a quarter ago “Showing more ads to the same people is a recipe for quickly having fewer people to show those ads to.” That puts pressure on Instagram, What’s App and Messenger, yet it’s still not clear how much more revenue per user those platforms can plausibly extract. Indeed, it’s not even clear how many more users are willing to join those ecosystems.
Buckle up. A great deal of light will be shed on the matter after Tuesday’s closing bell rings.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
