Facebook Stock Analysis Ahead of Q3 Earnings, Possible Cybersecurity Move

Nasdaq Facebook Stock Earnings Acquisitions

What’s Next for FB Stock?

After a prolonged bull market, U.S. equities are having a serious pullback. Among the tickers that are taking a tumble, Facebook, Inc. (NASDAQ:FB) deserves special attention due to its upcoming earnings report. The company is scheduled to release third-quarter financial results on Tuesday, October 30, after the market closes.

Will FB stock be able to reverse its downtrend? Let’s take a look.

Will Facebook, Inc. Deliver Strong Q3 Results and Earnings?

As is the case with most widely-followed tickers, FB stock has a set of expectations to beat in earnings season.

On average, Wall Street analysts expect the social media giant to report $13.78 billion of revenue for the third quarter of 2018, which would represent a sizable 33.4% increase year-over-year. Earnings, on the other hand, are projected to come in at $1.47 per share, which would indicate a decline of 7.5% from the $1.59 per share earned a year ago. (Source: “Facebook, Inc. (FB),” Yahoo! Finance, last accessed October 26, 2018.)

Stats on Facebook Stock

Earnings Per Share Estimate $1.47
Change From Year-Ago Earnings Per Share -7.5%
Revenue Estimate $13.78 Billion
Change From Year-Ago Revenue 33.4%
Earnings Beaten in Past Four Quarters 3

Source: Ibid.

Note that in the past 12 months, Facebook has beaten Wall Street’s earnings per share estimates in three of the four quarters.

Beating revenue and earnings expectations could be a big deal for FB stock, especially under the current market environment. Last Thursday, Alphabet Inc (NASDAQ:GOOG), the parent company of Google, reported earnings after the closing bell. While the company’s earnings beat estimates, its revenue missed Wall Street’s expectation. In after-hours trading after the earnings release, GOOG stock tumbled more than five percent.

Another Internet giant that took a beating on its earnings release was Amazon.com, Inc. (NASDAQ:AMZN), which also reported earnings on Thursday afternoon. And just like Alphabet, its bottom line topped estimates but revenue fell short of expectations. Moreover, the e-commerce giant also issued a less-than-expected fourth-quarter forecast. AMZN stock plunged as much as 10% in pre-market trading on Friday.

Mind you, Wall Street’s expectations are not the only thing investors will be watching for in Facebook’s Q3 earnings. The company also has to measure up against its own guidance, which wasn’t that optimistic to begin with.

“Our total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high single digit percentages from prior quarters sequentially in both Q3 and Q4,” said Facebook Chief Financial Officer David Wehner. (Source: “Second Quarter 2018 Results Conference Call,” Facebook, Inc., July 25, 2018.)

A Growing User Base

In my opinion, no FB stock forecast is complete without mentioning its user base. Because Facebook is in the social media business, the company makes money mostly from advertising. And the more users it has, the more appealing its service becomes in the eyes of advertisers.

On that front, Facebook has been doing a terrific job. Despite being around for more than a decade, the company is still growing its user base at an impressive pace.

In the second quarter of 2018, Facebook’s monthly active users were 2.23 billion, representing an 11% increase year-over-year. Daily active users also grew 11% from a year ago, to 1.47 billion. (Source: “Facebook Reports Second Quarter 2018 Results,” Facebook, Inc., July 25, 2018.)

If the company can continue to expand its user base at a double-digit clip, it could inject some much-needed investor confidence in FB stock.

Possible Cybersecurity Move: FireEye Acquisition?

No matter how bullish you are about the social media business, you have to admit that cybersecurity is a major concern surrounding the industry.

I don’t think companies need to go so far as to get new management to address the issue, but bolstering one’s cybersecurity competence in-house would definitely be a welcoming move for investors.

In fact, that’s another thing that investor will want to know during Facebook’s earnings conference call. The company’s Cambridge Analytica scandal is still in the rear-view mirror. It even led to investors taking a more enthusiastic look at many cybersecurity stocks.

Most recently, it was rumored that Facebook might buy FireEye Inc (NASDAQ:FEYE), one of the largest cybersecurity companies in the world. FireEye currently serves more than 7,000 customers across 67 companies, including more than 45% of the Forbes Global 2000. While this is still a rumor, buying a major cybersecurity firm could help Facebook fix its reputation.

Analyst Take

In the latest market sell-off, tech stocks—especially the dominant Internet giants—have taken a huge hit. Facebook stock hasn’t been a hot commodity for quite a while, and the latest market downturn only made things worse. My colleague Patrick Brik recently did an in-depth technical analysis of FB stock. From both a fundamental and technical point of view, it would take some serious good news this earnings season for Facebook stock to reverse its bearish trend.