Facebook (FB) to benefit from traffic surge in Q1; advertising slump damps long-term outlook

The tech industry was less affected by the pandemic-induced disruption than most other businesses, thanks to the surge in internet traffic during the lockdown, especially to news websites and social media platforms. Facebook Inc. (NASDAQ: FB), the most widely used networking platform, has witnessed a spike in visitors this year. Though the company might not have fully monetized the user growth, there is no doubt revenues gained from it.

Facebook Q4 2019 earnings infographic

Rarely do FAANG components offer such a compelling buying opportunity as Facebook currently does with its relatively low stock price. Taking a cue from the dip in valuation – in line with the general slump in financial markets – analysts have assigned the stock strong buy rating. While the market continues to face an uncertain future, it is almost certain that Facebook will get back on track once normalcy returns.

Estimates

Encouraged by the bullish near-term outlook, market watchers expect first-quarter earnings to more than double to $1.75 per share. They will be looking for a 16% growth in revenues to $17.53 billion when the company unveils the results on Wednesday after the closing bell. The bottom-line exceeded estimates in the trailing two quarters.

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That said, no business can expect to come out totally unscathed from such an unprecedented crisis, which has triggered apprehension that the economy is headed for a recession. Facebook and its peers who depend on online advertising for revenue generation face the risk of enterprises reducing their ad spending in the coming months.

Latest statistics show that online ad auction prices have dropped significantly, which paints a bleak picture for social media firms as far as long-term performance is concerned. The trend shows Facebook will have to hike marketing spending to sustain revenues, which will result in higher costs and put stain on margins.

Spending Cut

Already there is concern that the company’s top-line is nearing saturation due to competition. The market will be closely following the earnings conference call, expecting insights into the ad spending trend as Facebook is among the first social media firms to report this season.

“We spent the last year building infrastructure to turn our private messaging apps, WhatsApp and Messenger, into richer private social platforms, where you can hang out and be present with friends, find groups with your interest, engage with businesses more naturally.”

Mark Zuckerberg, CEO of Facebook, at the Q4 earnings conference call

Like some of its peers in the tech industry, the Silicon Valley firm is busy exploring new avenues for revenue generation such as video streaming, even as the social networking space gets more crowded. Giving a big boost to the expansion drive, the company recently bought a stake in India-based telecom firm Jio Platforms for $5.7 billion.

Strong Q4

Facebook reported another solid increase in users in the fourth quarter, continuing the ongoing trend. Advertising revenue grew 25% during the quarter, driving up earnings to $2.56 per share. The results also exceeded the market’s forecast. At the end of the fiscal year, the tech giant had 2.5 billion users.

Last year, the company got embroiled in multiple lawsuits related to data misuse and anti-competitive practices and ended up paying huge fines. Since then, it has constantly remained on the radar of regulators and investigation agencies.

Peer Performance

Among others in the social media space, Snap Inc. (SNAP) improved its position in the first three months of the year, with net loss narrowing on the back of a sharp increase in revenues. Twitter (TWTR) is scheduled to release first-quarter numbers on Thursday before the market opens. Earlier, the company withdrew its guidance in view of the deepening uncertainty.

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Facebook had an exceptionally upbeat start to the year and hit an all-time high of 224.20 in January, but was hit by the selloff caused by the coronavirus outbreak. The stock, which closed the last session down 15% from the recent peak, has been on the recovery path since mid-March.