Even a cursory glance at the fundamentals of Facebook (NASDAQ:FB) show a lack of investor trust. Facebook stock stock trades at a seemingly absurd multiple: about 18 times consensus FB earnings for 2019, backing out net cash.
That multiple seems ridiculous given the growth opportunities here. Facebook revenue likely rose around 36% in 2018. The figure should increase 24%, according to the Street, in 2019. Top-line growth doesn’t end there either. Instagram has halted the growth of Snap Inc (NYSE:SNAP) platform Snapchat. Neither it, nor messaging app WhatsApp, have even been monetized to any significant degree yet. Even the namesake platform still has room to improve revenue per user in international markets.
There are concerns about profit growth, admittedly. Spending on security and the user experience is rising sharply. That’s the key reason FB stock posted the largest one-day loss of market value in history after second-quarter FB earnings were announced back in August. It also explains why analysts expect those earnings to rise minimally year over year in 2019.
Still, that spend will slow over time, particularly as a percentage of revenue. The core concern with Facebook stock isn’t spending and it isn’t profits — it’s trust. A rough 2018 that began with the Cambridge Analytica scandal has eroded faith in CEO Mark Zuckerberg and COO Sheryl Sandberg. There’s a concern that at some point, users are going to defect. Even cyclical macro concerns could pressure what essentially is an advertising business.
And, so, FB earnings on Wednesday look important, if not crucial. Facebook has a chance to change the narrative — and move Facebook stock higher. If it can’t, however, as cheap as FB stock is, 2019 could look an awful lot like 2018.
FB Earnings Expectations
Consensus estimates for Q4 look achievable. The Street is looking for revenue growth of 26.4%, a notable deceleration from the 42% in Q2 and 33% in Q3. EPS figures are more aggressive, with analysts expecting roughly 50% growth, albeit with the last quarter of help from corporate tax reform.
That said, this isn’t a quarter where the backward-looking numbers are likely to move FB stock much. The one exception might be users: DAUs (daily active users) have flattened in the U.S., Canada, and Europe, and a decline in those markets might spark more worries about the health of the namesake platform.
But from a broad standpoint, the concerns here are about what will happen in 2019 — not what did happen in 2018. And, so, this seems likely to be a quarter where it’s not the FB earnings report that moves the market, but rather the post-earnings conference call.
The Call and FB Stock
The primary goal of Facebook management on the call has to be to re-inspire confidence. In the year-plus since the information surrounding Cambridge Analytica has come to light, there has been a steady drip of negative stories. (In December, BuzzFeed News compiled a list of the scandals.)
The pressure seems to have continued in 2019, even though FB stock has rallied. There have been allegations that a huge number of Facebook accounts are fake. Recently released internal documents show that Facebook employees pushed developers to let children spend money without their parents’ permission.
At the same time, regulators are coming, as Luke Lango pointed out this month. Facebook, Snap, Alphabet (NASDAQ:GOOGL,GOOG), and Twitter (NYSE:TWTR) all are under threat of either content restrictions and/or “digital taxes”. And a management team that is constantly putting out fires perhaps is not going to be able to nimbly respond to those larger concerns.
Facebook needs to show that it’s on top of its business. And it needs to detail a coherent strategy moving forward. That should include a particular focus on WhatsApp and Instagram. The founders of both units left last year. Reports indicate that Zuckerberg is looking to merge messaging across the three platforms. If that’s the case, the CEO needs to make it very clear why he plans to do so — and how Facebook earnings will benefit.
Facebook Stock Can Rise
If Facebook can tell a better story on Wednesday afternoon, there’s room for a nice bounce in Facebook stock. As I pointed out earlier this month, analysts remain firmly behind FB. The numbers still work, with room for the earnings multiple to expand. And FB stock remains some 32% below July highs.
That still seems like a big “if”, however — and it puts pressure on this report. If investors on Thursday morning still don’t trust the strategy, and still are waiting for the next shoe to drop, it’s going to be difficult for Facebook stock to gain much traction in 2019. It’s up to Facebook management… and, after the past year, I’m not quite ready to bet on them just yet.
As of this writing, Vince Martin has no positions in any securities mentioned.
