Facebook spending timeline in focus

Earnings are set to be robust, but will expenditure ease?

Facebook Inc. reports Q3 2019 earnings on Wednesday 30th October, after the U.S. market close

Epicentre of scrutiny

Facebook remains at the epicentre of growing regulatory threats that could eventually clip Big Tech’s wings, with CEO Mark Zuckerberg recently grilled by a high-profile Congressional committee as probes into whether FB and others are using their dominance to thwart competition gather pace. A record $5bn fine to settle U.S. claims that it repeatedly violated users’ privacy buffeted the stock even after a strong Q2. Facebook also faces antitrust and privacy probes in Europe.

Shares resilient

Despite all this, there’s been no clear chill detectable in investor appetite for Facebook shares of late. They’ve eased from a 30% ascent relative to the S&P 500 between the start of 2019 to July. But they were still outperforming the benchmark by 17.5% over the year to date on Wednesday. Boosted advertising sales growth on the back of Facebook Stories, that buoyed Q2, should remain evident in Q3, despite softer guidance. Rising video adoption and better-managed pricing volatility pose upside risks to forecasts. Instagram (now including Instagram TV) monetisation of which is still being incubated, also supports valuation multiples regardless of quarterly outcomes.

Spending Watch

One front where investor scrutiny of FB’s third and forthcoming quarters will be acute is expenditure. Like many Big Tech counterparts, the social media group has been pumping vast sums of cash into initiatives aimed at securing future growth and markets, getting ahead of rising global demand for better user health, privacy and security, as well as a likely more onerous regulatory environment in the years ahead. A risk of higher provisions for legal costs and settlements does not look particularly priced into the stock at present. Additionally, with free cash flow mostly negative for the last two years of intense investment, Wall Street is eyeing a return to cash generation in 2020.

Investors are already primed for spending to show a fairly hefty ramp in the current financial year. However, Facebook could well signal a pause in the quantum of spending growth by tightening 2019 operating expenditure guidance from its current 37% to 45% range. But any hints from Wednesday’s report that Facebook’s expenditure story has further to run could take some of the shine off earnings-fuelled enthusiasm by the shares.

Low scale Libra concern

Aside from spending, investors continue to signal that other present or future headwinds are relatively immaterial. For instance, flake outs by high-profile corporate partners from Facebook’s cryptocurrency project, Libra, as well as strident opposition from central banks, are a headache, though not much more, for the moment.

Key estimates (consensus compiled by Bloomberg)

3Q adjusted EPS: $2.28, +8.5% year-on-year

3Q revenue: $17.35bn +26.4%

3Q daily active users: 1.6 billion, up 7.5% year-on-year

3Q monthly active users: 2.45 billion, up 7.6% year-on-year

3Q gross margin: 80.2%

4Q adjusted EPS: $2.92

4Q revenue: $20.94bn

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Products and services available depend on your location and the entity holding your account. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.