What to expect from Facebook earnings - Stock Market News

27 juill. 2021 à 3h10 GMT- Marios Hadjikyriacos

The world’s dominant social media platform will report earnings on Wednesday after markets close. Another stellar quarter is expected as the company reaps the rewards of the booming online-ad market. Overall, Facebook’s future remains promising as it enters the VR arena, with the only real risk being a monopoly lawsuit. 

Winning

The gravy train keeps on rolling for Facebook. The company has surpassed $1 trillion in market capitalization lately amid signs that the online advertising market is making a huge comeback. With Facebook and Google being the biggest players in online advertisement, investors are confident that business is booming. 

Beyond having 2.9 billion monthly active users on Facebook alone, the company also owns Instagram and WhatsApp, both powerful platforms with loyal users of their own. That essentially means the company can reach half the world’s population with its online ads, something truly unprecedented. 

Naturally, this has drawn the attention of US regulators. The Federal Trade Commission recently brought an antitrust case against Facebook, arguing that it holds too much monopoly power after buying Instagram and WhatsApp. 

This case is significant, but it shouldn’t be overblown. Facebook has faced several scandals and legal battles over the years but it has managed to come out unscathed. It has an army of lobbyists and lawyers at its disposal, making any serious monopoly action against it - like a forced break-up - seem quite unlikely. 

Strong quarter

For the second quarter, the company is expected to report revenue of $27.8 billion, which represents a whopping 49% increase from the same quarter last year. That is expected to translate into $3.04 in earnings per share, an increase of almost 69% from a year ago.  

This is impressive. It shows that profit margins are improving and that the crisis has passed. Even monthly active users are expected to have reached new record highs, despite the reopening of most economies during the quarter. 

The market reaction will depend on whether the actual numbers are stronger or weaker than expected, and on what the company’s executives say on the conference call with analysts. 

Facebook has a strong history of beating earnings estimates, having done so in all four of the preceding quarters for example. Of course, investors have already gamed this pattern, judging by the recent rally. That means market expectations are already very elevated, so a fantastic quarter is needed for the stock to rally further. A minor beat could even see the stock retreat a little. 

Metaverse company

In the big picture, the future for Facebook seems promising. When a company has half the world’s population using its platforms, even small changes in the business model can lead to tremendous increases in sales and profits. Monetizing is easy when your audience is so massive. 

Another crucial element is CEO Mark Zuckerberg’s plan to transform the social media giant into a ‘metaverse’ company. Zuckerberg has hordes of engineers working on virtual and augmented reality projects, aiming to change the entire experience of Facebook. Instead of viewing content, he wants people to feel they are in it.  

This could be the next source of growth for the company. At the very least, Facebook is going to be among the leading players in the emerging VR/AR arena, which could be huge in its own right. 

The cherry on the cake is that the firm’s valuation is reasonable. Forward price to earnings stand at 26x and forward price to sales rest at 8.2x, which isn’t very expensive for a leading tech company that’s growing quickly. 

Taking a technical look at Facebook shares, a strong earnings beat could propel the price above the all-time high of 375.3 level into uncharted waters. In this case, resistance to further advances could be found around the psychological 400 region. 

On the downside, a disappointing earnings report could see the market break below the 359 barrier, turning the focus towards the 335 zone.