Can Facebook Continue To Defy Headwinds And Churn Out An Earnings Beat In Q2?

by Trefis Team
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Facebook (NASDAQ:FB) reports its Q2 earnings on Wednesday, July 24. In Q1, the company had beat consensus expectations for revenue and earnings. In Q2, we will be looking for updates on:

  • Platform health initiatives: Facebook has been under intense scrutiny over the recent past due to privacy scandals. The company’s management had outlined plans to improve platform health last year and we hope to see more details around the steps taken, and their impact on the social media platform.
  • Project ‘Libra’: Facebook had proposed the launch of a cryptocurrency which has been mostly met with mixed reviews, with a negative bias. We hope to hear management’s side of the story as to how Libra will navigate through the challenges of security and privacy.
  • Combined messaging platforms: Facebook had proposed a merger of its existing messaging platforms, which will have access to nearly 2.7 billion unique users. We will also be hoping to get management comments on the progress of this project.

Trefis estimates Facebook’s valuation to be $189 per share. We capture trends in Facebook’s Earnings over recent quarters in an interactive dashboard along with our forecast for full-year 2019. You can modify any of the key drivers to visualize the impact of changes on the company’s share price estimate. Additionally, you can see more Trefis technology company data here.

A Quick Look at Facebook’s Revenues

Facebook makes money from online advertising and from payments transactions. The company reported revenues of $55.8 billion in 2018 through the following two segments:

  • Advertising Revenue ($55 billion 2018 revenue, contributed 98.5% to total revenue): Segment revenue is derived from online advertising across Facebook’s properties.
  • Payments and Other Fees ($825 million 2018 revenue, contributed 1.5% to total revenue): Segment revenue is derived from fees received to use Facebook’s payment infrastructure and hardware revenues.

Facebook’s Operating Trends Over Recent Years, And Our Expectations For 2019

  • Advertising revenue reached $55 billion in 2018 from $27 billion in 2016. The change of $28 billion between 2016-18 implied an annualized rate of 43%. Q1 2019 revenue came in at $15 billion (26.4% y-o-y), and we expect 2019 revenues to reach $66.5 billion (21% y-o-y).
  • Payments and Other Fees have remained largely around $800 million over recent years, and we expect it to remain around that level for 2019
  • Facebook’s revenues (shows key revenue components) reached $56 billion in 2018 from $28 billion in 2016. The change of $28 billion between 2016-18 implied an annualized rate of 42%. Q1 2019 revenue came in at $15 billion (26% y-o-y). We expect 2019 revenue to reach $67.3 billion (20.5% y-o-y).
  • Facebook’s Total Operating Expenses reached $22 billion in 2018 from $11 billion in 2016. The change of $10 billion between 2016-18 implied an annualized rate of 37%. The faster growth in revenues compared to expenses helped Operating Income swell to $25 billion in 2018 from $12 billion in 2016. We expect the figure

Per Trefis estimates, Facebook’s EPS for full-year 2019 is expected to be $8.71. Taken together with a P/E of 22x, we arrive at a fair value of $189 for Facebook’s stock (shows cash and valuation analysis), which is roughly 5% below the current market price.

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