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Facebook (FB) to Report Q2 Earnings: What's in the Cards?

Facebook, Inc. FB is set to report second-quarter 2017 results on Jul 26 after the market closes. The company reported a positive earnings surprise of 18.18% in the last quarter. It has also delivered an average positive earnings surprise of 16.69% over the trailing four quarters.  Let’s see how things are shaping up for this announcement.

Factors to Consider

As has been the case for the past several quarters, online and mobile advertising revenues will continue to be in the spotlight this upcoming quarterly earnings release as well. Facebook’s mobile ad business has fast emerged as the major contributor to its advertising revenues. Mobile monetization has increased with a higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads.

Facebook’s foray into “Live” is expected to be a big contributor to the top line. The company has been aggressively promoting “Live” in order to capture the opportunity presented by ever-increasing video viewing on social media platforms.

Ever since its availability to worldwide advertisers last year, Instagram’s ad platform has emerged as an important cash cow for Facebook. With over 700 million users, Instagram is now set to join the company’s other billion-plus platforms – Facebook, Messenger and WhatsApp. Investors will once again be focused on Instagram’s money-minting abilities to boost overall ad revenues for the company. The Instagram Stories platform was opened to global advertisers in March this year. Notably, Stories now boasts 250 million daily average users.

After Instagram, investors will be looking at the company’s detailed monetization efforts for Messenger and WhatsApp. A few weeks back, management had announced that it will be opening its subsidiary platform, Messenger, to worldwide advertisers. However, it will be for test run purpose only, underscoring the company’s efforts to monetize the platform.

Facebook’s huge user base of over 2 billion enables it to fend off any competition. However, with the user base already at sky-high levels, a relative slowdown is imminent. Also, it is approaching full penetration in North American and European markets. Nevertheless, growth in Asia and the rest of the world should help cushion user growth in the foreseeable future. In the past one year, the company’s shares have generated a return of 35.2% compared with the industry’s gain of 22.6%.

However, Facebook needs to tread cautiously so as not to irritate users with too many ads. Competition from the likes of Snapchat SNAP and Google for ad dollars is also concerning. Facebook maintains a cautious stance on future growth prospects.

The company has stated that revenues will now face tougher year-over-year comparisons. In addition, costs will rise once the company goes on a hiring spree, which may especially comprise engineers. However, the high revenue growth rate is expected to stabilize eventually. We believe Facebook will continue with the good show going ahead as it has ample growth catalysts. 

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 both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.13. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Facebook’s Zacks Rank #1 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

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

Facebook, Inc. Price and EPS Surprise

Facebook, Inc. Price and EPS Surprise | Facebook, Inc. Quote

Stocks to Consider

Here are some stocks that, per our model, have the right combination of elements to post an earnings beat this quarter.

Cypress Semiconductor Corp CY has an Earnings ESP of +11.11% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Energizer Holdings Inc ENR has an Earnings ESP of +2.78% and a Zacks Rank #2

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