At the end of a 2018 filled with scandals and negative headlines, Facebook Inc. is expected to report its most profitable quarter in history.
When Facebook releases results Wednesday after the closing bell, the empire of websites and apps controlled by the company is expected to report nearly $6.4 billion in profit for the final three months of the year, over $1 billion more than it has ever reported in a quarter previously. Calendar fourth-quarter advertising sales are typically the highest of the year, as advertisers attempt to attract holiday shoppers, but Facebook is still expected to beat the holiday quarter last year by more than $2 billion.
Facebook’s record profits come amid months of scandals that have dogged the company seemingly nonstop since the Cambridge Analytica data-privacy controversy erupted early last year. Since the revelations about tens of millions of users’ data being improperly accessed, controversies surrounding the data Facebook collects and the sometimes deadly impact of fake news, among other things, have led the company to repeatedly apologize and attempt to explain its actions to Congress and the public.
Chief Executive Mark Zuckerberg has been warning investors through that time that Facebook’s efforts to improve security and community safety — Zuckerberg said the company would add 20,000 people, for example — are going to significantly eat into the bottom line. Judging by expectations for this quarterly report, though, those efforts don’t appear to be hurting profits too much.
What to Expect
Earnings: On average, analysts polled by FactSet estimate fourth-quarter earnings of $2.18 a share, up from $1.44 a year ago, though that profit total was shaved down from changes to the U.S. tax code. Contributors to Estimize, which crowdsources estimates from analysts, fund managers and academics, predict earnings of $2.21 a share.
Revenue: Sell side analysts on average model fourth-quarter revenue of $16.4 billion, up from $12.97 billion in the year-earlier period. Estimize contributors predict revenue of $16.41 billion.
The bulk of Facebook’s revenue is from mobile ad sales, which analysts on average estimate at $14.94 billion in the fourth quarter, according to FactSet. Desktop ad sales are expected to decline to $1.27 billion from $1.41 billion in the year-earlier quarter. The company’s Oculus virtual reality hardware is included along with revenue from Marketplace in “Payments and Other Fees,” which analysts expect to be $197 million.
On average, analysts expect Facebook to collect an average of $7.11 in revenue for each user. Wall Street expects European daily active user growth to remain flat compared with the third quarter; analysts expect modest daily member growth U.S. and Canada to 185.3 million, up from 185 million in the third quarter.
Stock movement: Facebook stock has declined roughly 0.1% in the past three months, as the benchmark S&P 500 index fell 0.7%. Of the 49 sell-side analysts that cover Facebook, 40 have buy or overweight ratings on the name, seven rate it a hold and two have a sell rating. The average price target is $185.51, which represents a 27% upside from Thursday’s closing price of $145.83.
What to Watch For
While much of Facebook’s growth through its history has been due to its core Facebook app, Instagram has become a massive source of revenue for the social network, according to projections from eMarketer. By the end of 2019, Instagram will haul in $14.38 billion in world-wide sales, which amounts to 4.4% of the global ad market and 6.2% of the global mobile market.
Facebook currently does not tell investors how much money Instagram, Messenger or WhatsApp make. According to the New York Times, the company plans to merge the underlying technical infrastructure of its various properties by early 2020.
J.P. Morgan analyst Doug Anmuth wrote in a note to clients Friday that Facebook is the most discussed and controversial internet company, based on his recent calls and meetings with investors, but still successful. According to J.P. Morgan surveys, Facebook use remains high and Instagram continues to grow despite months of negative headlines.
“As is often the case [with Facebook], the forward-looking commentary and tone is likely more important than the reported quarter itself,” Anmuth wrote. “We don’t expect any big surprises. On the revenue front we look for Facebook to call out continued deceleration — likely mid-single digit — which should be expected.”
Anmuth has a $195 price target on the name with the equivalent of a buy rating.
Deutsche Bank Securities analyst Lloyd Walmsley wrote in a note to clients that Facebook is his “favorite mega cap internet name” for 2019, and rates the stock a buy with a $195 price target. Like Anmuth, he wrote that investors should look to the call for information about the company’s future revenue outlook.
Walmsley wrote that he is looking to Messenger, Watch and Facebook Search to become greater drivers of sales through 2019. Watch, the home for Facebook’s original-video efforts, has roughly 75 million daily active users, which could amount to a $275 million annual segment, he wrote. Walmsley also noted positively Facebook’s plan to add $9 billion in stock buybacks.
Barclays analyst Ross Sandler, who has a $180 price target and rates Facebook a buy, wrote in a note to clients that he expects regulatory risks and ongoing negative news stories will continue to be a problem. But those factors have been priced into the stock at this point, he wrote.
“The best opportunity in large cap internet is to catch a quality name when sentiment is washed out, valuation is depressed and positioning is offsides (as experienced with Alphabet Inc. and Amazon.com Inc. heading into 2015), and this could be the setup for Facebook right now.”