FB Earnings: What to Expect from Cambridge Scandal, Ad Sales, #DeleteFacebook

Facebook stock
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When Does FB Announce Earnings?

As Facebook, Inc. (NASDAQ:FB) prepares to announce its Q1 earnings at 5:00 p.m. ET on April 25, 2018, it’s becoming clear that investors won’t let the Cambridge Analytica scandal fade away. It still haunts them. Worse still, it could pour cold water on Facebook’s quarterly report.

With that in mind, let’s take a look at the issues most likely to come up in Wednesday’s Facebook earnings call.

Obviously, Mark Zuckerberg going to Capitol Hill is high on the list.

The young CEO had to face down a horde of angry (or media-hungry?) politicians in the wake of the scandal. He also had to answer some pretty dumb questions about how Facebook works, along with tougher questions on privacy, data, and the integrity of Facebook’s business model.

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It was a farce. But that doesn’t mean it’s not worrying.

Politicians are capable of anything when voters are angry—they could easily regulate Facebook in such a way that profits—and by extension, the FB stock price—come crashing back to Earth.

So, I expect a lot of questions about the Zuckerberg-Congress faceoff.

I also expect Facebook’s ad revenue will be put under the microscope. Investors are terrified that changes to the platform will hurt advertising sales. And while we’re on the subject of users, there’s also a lot of concern about the #DeleteFacebook campaign.

Both of these metrics—ad revenue and subscriber growth—are crucial to Facebook stock.

These changes are coming at 100 miles an hour, making it difficult for investors to make sense of them. So, in order to help, we’ve isolated them to see what impact they could have on Facebook’s Q1 earnings.

Facebook’s Reaction to the Cambridge Analytica Scandal

For those keeping count, Facebook’s troubles began long before the Cambridge Analytica scandal. It actually started with the 2016 election, when malicious actors co-opted the platform to spread “fake news.”

Critics believed that Facebook should regulate the content on its platform. Mark Zuckerberg disagreed. He basically shrugged when asked about it, saying that Facebook was content neutral. It’s a tech company, not a media company, he said.

Fast forward to January 2018.

Unfortunately, criticisms of Facebook have not vanished. In fact, they’ve gotten stronger and even more legitimate.

Since it would be politically disastrous to keep ignoring the problem, Mark Zuckerberg announced that Facebook would tweak its algorithm to show more posts from “friends and family,” and fewer from “professional content producers.”

Put another way, Facebook tried to postpone Judgment Day. It essentially front-run regulators in order to protect its long-term interests. That’s great. But as an investor, I can’t help looking at the flipside. Less time for content means less time spent on Facebook, doesn’t it?

Mark Zuckerberg admitted this was a possibility in his announcement. (Source: “Mark Zuckerberg Facebook Wall,” Facebook, January 11, 2018.)

“Now, I want to be clear: by making these changes, I expect the time people spend on Facebook and some measures of engagement will go down,” he wrote. “But I also expect the time you do spend on Facebook will be more valuable.”

Although this change was implemented halfway through Q1, it still might have an impact on today’s FB earnings report.

To make matters worse, Facebook recently published a set of content guidelines that prohibit offensive material. Investors saw this as Mark Zuckerberg bowing to political pressure, which led to a sharp 3.7% decline.

Chart courtesy of StockCharts.com

Ad Revenue: Up, Down, or Even?

Facebook’s ad sales have typically traveled in one direction: Up. Is that in jeopardy now that Facebook has tweaked the “News “Feed algorithm? Maybe.

According to one of Facebook’s advertising partners, the number of ad impressions (a key metric) was down year-over-year in January. There was a small jump in February, but even that feeble increase was nothing like the growth Facebook is used to having.

Facebook might offset the slowdown by charging higher prices for each ad (the data says that’s exactly what’s happening), but I don’t see that solving the long-term problem. Essentially, Facebook has to decide whether it’s serving its customers or its investors.

Keep a close eye on ad revenue this quarter. It is a bellwether of things to come.

Should You Worry About #DeleteFacebook?

At first, I was worried that people might actually join this campaign. Privacy concerns are at all-time highs and there are other social media outlets, like “Twitter” or “Snapchat,” that people can move toward.

But it isn’t happening.

We know this because Zuckerberg said so during his Senate testimony. About three-and-a-half hours into the hearing, a senator asked him if there have been changes to user growth since the Cambridge Analytica scandal. Zuckerberg responded:

“Senator, there have not.” (Source: “Watch Facebook’s Mark Zuckerberg testify before Congress,” YouTube, April 10, 2018.)

Considering that he was speaking at an official Senate hearing, it’s safe to assume that Zuckerberg was telling the truth. He also said it bluntly, without any caveats. So, we can assume that Facebook’s user count is stable.

Analyst Take

There are a lot of smart people at Facebook. I’m sure they know analysts are worried about the Cambridge Analytica scandal, ad revenue, and #DeleteFacebook. If I can figure it out, they can too.

My guess is they’ll have some answers ready.

Zuckerberg will probably reiterate that #DeleteFacebook hasn’t cost them subscribers. He’ll also look to reassure investors that ad revenue is trending positive, regardless of what happens this quarter. But as to the Cambridge Analytica scandal, there’s not much he can do except highlight the changes Facebook has made to its platform.

Overall, I think Facebook will beat expectations. How can it not? The bar is so low that Facebook could step over it.