Video Ad Push, User Growth To Aid Facebook's (FB) Q2 Earnings

Facebook’s (NASDAQ:FB) expansion of user base and advertiser base in the controversial second-quarter 2019 is expected to hog the limelight, when the company reports results on Jul 24.

The company continues to receive flak due to its failure to adequately police content particularly on sensitive issues, including the New Zealand mosque shooting.

Its self-regulation claims have also been under severe scrutiny due to continuing proliferation of fake news, hate speech, electoral interferences and privacy-related fumbles.

Nevertheless, Facebook’s huge user base of more than 2.7 billion (including Family of services — Instagram, WhatsApp and Messenger) presents a larger canvas for advertisers and makes the platform highly attractive.

Moreover, the company’s growing popularity in international markets, particularly Asia, is a key catalyst. The Zacks Consensus Estimate for Monthly Active Users (MAUs) in Asia stands at 999 million, indicating 11.7% growth from the year-ago quarter’s reported figure.

Click here to know how the company’s overall second-quarter performance is likely to be.

Video Initiatives Drive Ad Revenues

Undoubtedly, videos are playing a big role in strengthening Facebook’s social media dominance. The company intends to cash in on the ever-increasing trend of video viewing on social media platforms. Advertisers prefer video advertisements, as these appear to be the most lucrative medium to attract the audience.

During the quarter, the company introduced new products, including Automated Ads, for small businesses. Per TechCrunch, these ads not only run on Facebook but also on Instagram, Messenger and the Facebook Audience Network.

Facebook is also working to strengthen its AI-based detection system, which is expected to automatically block videos on sensitive issues. Per the company, the system has proactively detected more than 95% of harmful content before being reported by users, including spam, fake accounts and terrorist propaganda.

Video-supported ad revenue growth and increasing popularity of Stories are anticipated to be major growth drivers in the to-be-reported quarter.

The Zacks Consensus Estimate for second-quarter revenue advertising is currently pegged at $16.23 billion, indicating growth of 24.5% from the year-ago quarter’s reported figure.

Ad Transparency Efforts Boost Trustworthiness

Additionally, the company updated its News Feed ranking algorithm in the to-be-reported quarter. The algorithm change now prioritizes the Pages and groups that Facebook believes an individual finds most relevant.

Further, to improve ad transparency mainly related to political ads, the company has implemented rules in the United States, the European Union, Britain, India, Canada and Ukraine. Per the rules, advertisers looking to run political ads on the platform need to verify their identities and disclose the source of ad funding.

Moreover, the company continues to eliminate fake accounts from its platform. Per the third Community Standards Enforcement Report (covering fourth-quarter 2018 and first-quarter 2019), Facebook took down almost 3 billion fake accounts during the six-month time frame.

Notably, during the last quarter, the company reiterated its plan to bring the long-awaited “Clear History” privacy feature in the coming months. The feature will allow Facebook users to separate their internet browsing history from their profiles but is likely to hurt advertisers’ targeting abilities.

We believe video and ad transparency initiatives to improve Facebook’s trustworthiness and engagement level among users, thereby attracting advertisers. Notably, the company faces significant competition from Alphabet’s (NASDAQ:GOOGL) Google division, Twitter (NYSE:TWTR) and Amazon (NASDAQ:AMZN) for ad dollars.

Monetizing Instagram: A Key Catalyst

Instagram is Facebook’s fastest growing division and its rapidly expanding user base is attracting advertisers. The continuing momentum is expected to drive the company’s top line in the to-be-reported quarter.

Facebook is also looking for ways to monetize Instagram Stories, and adding the Checkout feature to the platform is a step toward that direction. The feature allows Instagram users to browse and purchase products from 23 top brands in the United States, all within Facebook’s app.

Moreover, solid adoption of the Explore tab, which is used by more than 50% of Instagram users every month, increases the platform’s monetization opportunities. Facebook recently revealed its plan to introduce ads in Explore Feed.

Facebook carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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