Facebook (NASDAQ:FB), the social media and digital advertising titan, is scheduled to report Q2 earnings on July 24 after market close. Despite the volatility in broader markets, FB stock has released relatively strong earnings in recent quarters.

As a result, year-to-date, the FB share price is up about 50%. Meanwhile, over the past year, there has been a shift in the global political environment, whereby more countries are calling for tougher regulation of the technology giants, including Facebook. Therefore, long-term investors are wondering as to what they should expect from FB stock’s fundamental metrics. Now that the earnings season is upon us, let us look at what may be ahead for the stock.

What to Look for in FB Stock’s Q2 Earnings?

As the owner of the largest social network in the world, Facebook’s current ecosystem, includes Facebook mobile and desktop, Instagram, WhatsApp and Messenger.

When Facebook stock releases earnings on Wednesday, Wall Street will pay attention to several metrics and issues.

Revenue: Facebook stock’s digital advertising business is the main revenue generator and the social network has a lucrative business model. In 2018, Facebook reported $22.112 billion in net income on $55.838 billion in revenue.

In Q1, revenue came in slightly better than expected and increased 26% year-over-year (YoY). Investors will want to see positive evidence on how 2019 is likely to shape up for the social media giant.

Facebook and Google’s parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) have a combined share of the U.S. digital ad market duopoly that stands well over 50%.

Daily active users (DAUs): FB stock’s most recent DAU number is approximately 20% of the global population. In Q1, DAU rose 8% YoY and 3% sequentially. In other words, Facebook is a clear winner in the social media space.

Facebook users are not only individuals, but also institutions, businesses of all sizes and organizations, including workplaces, community centers, schools and even places of worship. If the company reports any significant slowing of user growth or platform engagement, then Wall Street may raise its eyebrows.

Ad impression growth: In Q1, the number came in strong showing 32% YoY growth. Ads on Instagram stories and feed as well as Facebook newsfeed were the main drivers.

In other words, through the data collected on its platforms, Facebook can allow for a specific target to be reached via focused demographics, interest and a number of other criteria. Rich and reliable data, which FB has plenty, is at the center of digital advertising.

Price per ad: Last quarter, despite the impressive growth in ad impression, Wall Street was rather concerned that the average price per ad declined 4% YoY. Ideally, the company should not monetize stories or feeds at lower rates.

Profit margins: If investors see any sign of weakening profit margins, then they are likely to become concerned. Analysts have been noting that FB’s rising costs have been pressuring margins lower over time. If the quarterly results show that FB’s costs have unexpectedly risen, then, the stock price may take a hit.

In short, on Wednesday afternoon, Wall Street is set to find out whether Facebook can continue its positive fundamental and price momentum in the second half of the year.

Where Is Facebook Stock Price Now?

In April, following Q1 results, Facebook stock initially gapped up about 6% the next day to reach an intraday high of $198.48. However, that price became the immediate high for the next several weeks and the stock price declined to see an intraday low of $160.84 on June 4.

Then came the broader market rally in which Facebook also participated. On July 14, FB shares hit $205.47, an intraday high for 2019.

As we start the new week, FB stock is hovering around $199. If you are an investor who follows technical charts, you will note that the $200-level has become a resistance area.

Our readers may also be interested to know that on July 25, 2018, FB shares saw an all-time high at $218.62. Then, after market close the same day, FB released Q2 2018 earnings, which Wall Street was not happy with, and the next morning Facebook stock gapped down to open at $174.89.

It is not quite possible to know which way the stock will move on Thursday morning following the earnings report on Wednesday. Yet long-term investors would like to see FB stock close the gap from a year ago by moving to and staying over $218.62.

Riding on the momentum from an exceptionally strong earnings report, FB stock could easily reach a new all-time high price. However, considering how much the stock is up so far in 2019, investors would probably not hesitate to penalize the company if the quarterly report does not meet the rather high expectations.

The Bottom Line on FB

Facebook stock has a strong story and the company has a clean balance sheet with no debt; thus, it remains a long-term growth play on a fundamental basis. Going forward, Facebook is likely to successfully leverage its network for further sales and earnings growth. I also expect the group to make concentrated investments in privacy and security measures to alleviate regulatory and investor concerns.

Management has a good history of delivering better than expected quarterly results. And I am inclined to think the results will once again come in strong. However, there will likely be increased stock price volatility in the near-term, especially after the earnings report, that current and potential FB stock investors should anticipate.

If you aren’t already long Facebook stock, you may want to remain on the sidelines until the earnings report as near-term trading is likely to be choppy.

If you already own Facebook shares, then you may want to stay the course and ride out any short-term volatility.

Alternatively, those investors who have benefited from Facebook stock’s 2019 gains may want to take some of the paper profits as we look ahead to the next earnings report.

Or they may consider hedging their positions. As for hedging strategies, covered calls or put spreads with Aug. 16 expiry could be appropriate as straight put purchases are likely to be expensive due to heightened volatility.

The options for expiration on Aug. 16 are implying that the stock is likely to move by about 8-10% in either direction from the $200 strike price in the short-term following its results. In other words, a covered call hedge would enable investors to both profit from any potential up move and give some protection in case the stock falls following the earnings result.

The two important points to remember are that the trend is an investor’s friend and that FB is a volatile stock.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.