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Can the earnings growth continue for Facebook (FB
In the short term, at least, the answer is expected to be yes.
Analysts are confident that FB will once again meet or exceed estimates on the April 28 earnings call for the first quarter. But should FB enjoy the moment while it lasts?
These Are Clearly Good Times
The social networking company reported in January that revenue last year was up 22% over the previous year. Its earnings per share in the fourth quarter were $3.88, topping analysts’ consensus estimates of $3.22. Its Q4 revenue was up 33% year-over-year, its fastest growth rate in over two years, thanks to a strong retail holiday shopping season that was driven online during the pandemic. FB’s ad sales were clearly a beneficiary of all those eyeballs shopping online.
And the good times are expected to keep coming, at least in the near future. Its advertising prices were up 30% over its 2020 levels as of mid-March, according to research from marketing agency Aisle Rocket. In the beginning of April, FB shares hit a new high of $315 (see chart below). In February, its monthly active user base hit 2.8 billion, which includes Instagram, WhatsApp, and Messenger. That’s almost half the planet that uses one of FB’s apps. Of course, those numbers continue to lure advertisers who don’t—or can’t—pass up such outreach.
FIGURE 1: SOCIAL STURDY? Shares of Facebook (FB—candlestick) had been handily outpacing the S&P 500 … [+]
Could Apple Take a Bite Out of Its “Frenemy?”
But the good times may hit some bumps in the road. Apple (AAPL) has announced that when its IOS version 14.5 is released, for the first time its users will be asked if they want advertisers to track them via their iPhone’s unique identifier. Previously, being tracked was by default. The concern is that when asked, most people will decline to be tracked. FB uses tracking data for targeting ads—the lifeblood of its advertising.
On the FB earnings call in January, CEO Mark Zuckerberg said his company increasingly sees Apple as one of its biggest competitors. “Apple has every incentive to use their dominant platform position to interfere with how our apps and other apps work, which they regularly do to preference their own. This impacts the growth of millions of businesses around the world, including with the upcoming iOS 14 changes, many small businesses will no longer be able to reach their customers with targeted ads,” Zuckerberg said.
FB also acknowledged that two trends from which it benefitted in 2020—increased online shopping and a consumer shift during the pandemic to products and away from services—shouldn’t be counted on in 2021 for continued advertising growth as before. “Looking forward, a moderation or reversal in one or both of these trends could serve as a headwind to our advertising revenue growth,” the company said in its earnings press release.
Other Headwinds
FB, along with other technology giants, continue to be in the crosshairs of the multiple governments and legislators. In the US, the Justice Department, Federal Trade Commission (FTC), and 48 state attorneys generals have filed five lawsuits against FB, accusing it of abusing its dominance in the digital marketplace and engaging in anti-competitive behavior. It’s alleged that FB uses an unfair advantage against real or potential competitors by either buying them out or by flexing its market leader muscles. Allegations also include putting consumer data at risk, reducing the quality of consumers’ choices, and unfairly increasing the price of advertising.
And let’s not forget Section 230 of the Communications Decency Act, the 1996 law that gives internet companies sweeping immunity for hosting as well as moderating users’ posts. Lawmakers and others say the law gives FB and other social media firms a shield from being liable for what’s posted on their platforms.
Most likely, however, this won’t be resolved overnight. Legislators are split on the issue, with some saying that social media platforms are removing too much content, while others say they aren’t removing enough and allowing harmful content to spread.
Don’t Bring Out the Hankies Just Yet
It would probably be wise to not count out FB anytime soon. With its almost universal buy rating, no analyst is planning FB’s funeral. It continues to roll out new products and services, including creating a competitor to audio phenom Clubhouse, the invitation-only social media app that hosts increasingly popular virtual rooms for live events.
Zuckerberg has talked about augmented reality glasses as a key part of FB’s future offerings and driver of growth. Part of that vision is Oculus, the company that creates virtual reality headsets designed for video gaming that FB purchased in 2014. Its revenue reportedly doubled last quarter.
Will this be enough to keep up its momentum? Look for more clarity from the earnings call.
Facebook Earnings and Options Activity
Facebook is expected to report adjusted EPS of $2.36 for the first quarter, up from $1.71 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $23.53 billion, up 32.7% from the year-ago quarter.
Options traders have priced in an expected share price move of about 4% in either direction around the earnings release.
Looking at the Apr 30 options expiration, put activity has been highest at the 275 and 295 strikes, but there’s been more activity to the upside, particularly in the 310- and 320-strike calls. The implied volatility sits at the 27th percentile as of Wednesday morning.
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.
TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.
