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With uncertainty surrounding the impact of news feed overhaul on Facebook Inc (NASDAQ:FB) financials, is FB stock still a good buy?
Shares of Mark Zuckerberg led Facebook Inc (NASDAQ:FB) had gotten off to a strong start in 2018 only to lose momentum after the announcement made by the CEO on January 11th about the company's strategy in 2018 for its news feed. The social media giant's new focus could mean less time spent on the platform. With Facebook coming under pressure from all fronts for Russia’s potential involvement with the US elections using their platform, there is increased scrutiny on Facebook's future growth prospects with its latest strategy as it reports its fiscal fourth-quarter earnings on January 31st, after market close. Will the latest overhaul cost FB stock badly? Is Facebook stock still a good long-term buy ahead of its earnings? Let's take a closer look.
Will Facebook revenue growth slowdown due to news feed changes?
Facebook stock has been the beneficiary of strong earnings and revenue growth which have been one of the major driving forces behind the stock's bull run over the last few years. However, the company's news feed strategy for 2018 which aims to focus more on personal moments than posts from businesses, brands and media could substantially reduce the amount of time spent by a user on the platform. Studies and research reports estimate that an average user spends from 35 to 55 minutes on the Facebook platform. The content from publishers and brands has been one of the few reasons which have contributed to increase in time spent on the platform though passively without much interaction. The news feed has been at the heart of advertising revenue for Facebook with sponsored content playing a big part in driving the company's advertising revenues. Now with the latest changes, there are bound to be repercussions but FB stock investors may not be overly worried.
As we had highlighted in our earlier coverage on FB stock, according to the company's 10Q filing with SEC, there are three factors which are driving the ad revenue growth: (i) an increase in average price per ad, (ii) an increase in users and their engagement, and (iii) an increase in the number and frequency of ads displayed on mobile devices. Now with the latest strategy changes, the third factor may be neutralized but this could be offset by rising ad prices on Facebook. A fellow author at waldorf-kras had earlier thrown light on how during the third quarter, the average price per ad increased by 35% compared to 6% increase in the same quarter last year.
For the nine months of this year, the average price per ad is up by 25%, a massive improvement over 7% growth in the corresponding quarter last year. And, now according to many in the industry, the potential impact of fewer engaged hours would result in a further rise in ad prices. As per, Kunal Gupta, CEO of Polar, a company which provides various solutions for publishers, estimates that "the price of advertising on Facebook could go up by 25% within 3 months, 48% within 6 months and 79% within 12 months." This is massive and may help Facebook to continue its strong top-line growth in 2018 as well.
Other things to watch during earnings.
In the last quarter earnings call, Mark Zuckerberg stated that "I've directed our teams to invest so much in security on top of the other investments we're making that it will significantly impact our profitability going forward, and I wanted our investors to hear that directly from me." With the growing revenues, the operating costs of the company have also grown at a rapid pace. Now, with an increase in investments which are bound to have an impact on margins, investors also need to keep an eye on rising total expenses, which were $5.2 billion in Q3, up 34% YoY. And, David Wehner, CFO, Facebook also had warned that full-year 2018 total expenses are likely to grow at approximately 45% to 60% compared to full-year 2017. That number is huge and could have a significant impact on the company's financials. Investors would be better off to keep a close eye on this metric during the earnings call.
At the same time, the user growth metric is key to Facebook's growth. The progress on the Instagram, Messenger and Whatsapp front is also vital to FB stock. Facebook still dominates the social media and messaging service space with its family of apps occupying the top slots in terms of active users. The reach offered by Facebook to advertisers is too big to avoid. Facebook monthly and daily active users both rose by 16%YoY in Q3, so, again, it would be expected the user growth is healthy in the latest quarter as well. Instagram user growth is another one big metric which is widely followed.
What to expect from Q4 earnings?
The current Wall Street consensus expects the Mark Zuckerberg co-founded company to report a non-GAAP earnings of 72 cents a share, down from an EPS of $1.95 in Q4 2017, a 27.6% YoY rise. On the top line front, Wall Street analysts expect the company to report revenue of $12.54 billion, good for a 42.4% year-over-year growth. If these numbers were to hold true, then Facebook would report its slowest YoY earnings and revenue growth in the last 8 quarters. Given the company's strong track record of beating earnings estimates, it is likely that another earnings beat is on the cards but the question is, will it even exceed the high-end estimates; can the high growth continue in 2018 as well?
While Facebook's platform content is likely to see some major changes going ahead, the company is likely to see a decent top and bottom line growth. Facebook with its family of apps is still the biggest social media player with a huge audience reach and as stated above, the rise in ad prices could likely offset any other headwinds for the company's advertising business. FB stock is still a good long-term buy and it also happens to be part of our best stocks to buy portfolio which has outperformed the Nasdaq Composite by over 136%. Having said all this, investors should be also watching out for the guidance shared by the company in the earnings call, as this could have a significant impact on the stock's near-term fortunes.
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