Will Facebook (FB) Deliver Stellar Earnings Again In Q2?

Facebook, Inc. (NASDAQ:FB) is set to report second-quarter 2016 results on Jul 27. The company reported a positive earnings surprise of 29.55% in the last quarter. It has also delivered an average positive earnings surprise of 11.80% over the trailing four quarters. Let’s see how things are shaping up for this announcement.

Things to Watch Out for this Time

Investors ’area of interest again this quarter will be online and mobile advertising revenues. Facebook has gained significant traction in its mobile ad business within a very short span of time. Mobile monetization has increased with a higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads. Notably, in the first quarter, mobile ad revenues grew 75% to $4.2 billion representing 82% of total ad revenues. However, Facebook needs to tread cautiously so as not to irritate users with too many ads.

After opening its ad platform to worldwide advertisers last year, Instagram has emerged as an important cash cow for Facebook. Again there were no exact numbers for the last reported quarter with regard to contribution from Instagram but Facebook said that the platform has now over 200,000 advertisers. The fact that the ad platform has been well received is reflected in increases in both overall ad impressions and average ad prices. Average price per ad increased 5% from the year-ago quarter and ad impressions grew 50% due to increases in mobile impressions. Investors will once again be focused on Instagram’s money minting abilities to boost overall ad revenues for the company.

Moreover, Facebook has been aggressively promoting “Live” in order to capture the opportunity presented by ever increasing video viewing on social media platforms. Leading research firm, Forrester Research projects digital ad revenues to touch $12.6 billion by 2019. The company has signed deals with Internet and media celebrities to churn out more content for its Live platform. However, in the aftermath of the racial tensions that erupted across U.S, after graphic videos of two Afro Americans shot dead by police went viral on the network, Facebook has made updates to its Live Policy content. Facebook has reassured users that any offensive content will be reviewed by its trained staff that works 24x7 and if needed, the content would be taken down. Facebook isn’t taking the matter lightly as it can deflect users.

Given that Facebook has hit a jackpot with the monetization of Instagram, investors will be looking forward to the commentary on Messenger, Oculus, and WhatsApp. Facebook is now working aggressively to monetize these platforms. Recently Messenger crossed the 1 billion user milestone. It is the third 1 billion plus user platform for the company after Facebook and WhatsApp. Plus, Messenger’s bot platform reportedly now boasts over 18K chatbots.Chatbots could serve as a powerful strategy to monetize the platform. Messenger has over 40 partners in the commerce, transport and aviation sectors. KLM Airlines was the first airlines to offer flight updates, check in & more on Messenger.

User growth numbers will also be in focus. With a gargantuan user base of 1.65 billion, Facebook is the largest social media platform. Facebook’s Monthly Active Users (MAU) and Daily Active Users (DAU) have also crossed the billion mark. With its user base already at sky high levels, a relative slowdown is imminent. Also, the company faces heightened competition for ad dollars. Plus, rising expenses can thwart its margin growth.

Moreover, Facebook finds itself increasingly at loggerheads with authorities across different countries who accuse the social media giant of repeatedly failing to co-operate with them on extremely sensitive matters. Recently, Israel accused Facebook of not removing offensive content that Palestinians post against the country on the network that tends to glorify terror. Moreover, Facebook faces a $1 billion lawsuit filed by the kin of victims who died in Israel terrorist attacks. They have accused Facebook of providing support to Hamas, a radical outfit deemed as a terrorist organization by the U.S. It is also facing trouble in Brazil and Germany over antitrust concerns.

Earnings Whispers

Our proven model does not conclusively show that Facebook is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Facebook has an Earnings ESP of 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 62 cents.

Zacks Rank: Facebook has a Zacks Rank #3, which increases the predictive power of ESP. But we need to have a positive ESP to be confident of an earnings beat.

Please note that we caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

FACEBOOK INC-A Price and EPS Surprise

Stocks to Consider

Here are a few stocks that, as per our model, have the right combination of elements to post an earnings beat this quarter:

Innoviva, Inc (NASDAQ:INVA) with an Earnings ESP of +25.00% and a Zacks Rank #1.

GoDaddy Inc. (NYSE:GDDY) with an Earnings ESP of +50.00% and a Zacks Rank #3.

Amazon.com, Inc (NASDAQ:AMZN) with an Earnings ESP of +37.72% and a Zacks Rank #3.