Facebook’s Q2 Earnings Could Show Growth Unhurt Despite Challenges

* Reports Q2 2019 results on Wednesday, July 24, after the close

* Revenue expectation: $16.5B

* EPS expectation: $1.87

Facebook (NASDAQ:FB) stock's gradual rebound since December has been spectacular. It shows clearly that despite regulatory probes, fines, and general mistrust, advertisers have no alternative as powerful as Facebook to reach their customers.

Facebook's shares have surged more than 60% since the Dec. 24 low, to close yesterday at $202.32. This strong rebound comes after a tumultuous 2018, during which the shares plunged 26%, sapping investor confidence with a variety of high-profile setbacks, including data breaches, user privacy concerns and the political manipulation of its platform.

Facebook price chart

Early this month, Facebook settled with the U.S. regulator by agreeing to pay a record $5 billion fine to resolve the Cambridge Analytica data scandal. While details of the settlement with the U.S. Federal Trade Commission weren’t announced, the fine is steep but far from devastating for Facebook. The company, which reported revenue of almost $56 billion in 2018, had set aside $3 billion in anticipation of the fine.

Though these issues continue to pose a major challenge to social media companies’ future growth as politicians and regulators try to put together a set of rules to control and stem misuse, investors are becoming more confident about CEO Mark Zuckerberg’s ability to produce market-beating returns even in this adverse operating environment.

Facebook will likely report $16.5 billion in sales tomorrow, a surge of about 25% when compared to the same period a year ago, according to analysts’ consensus forecast. Profit per share is seen rising 7% to $1.87.

New Growth Drivers

What’s keeping investors excited about Facebook’s prospects is its ability to continue attracting ad dollars with its 2.7 billion users on different platforms. This optimism, in our view, stems from the fact that Facebook, which operates the world’s largest social communities and messaging services, including Instagram and WhatsApp, is still as valuable for advertisers as it was before all the controversies and scandals erupted.

A key growth area for Facebook is the company’s Stories features, which are full-screen photos and videos users can post on Facebook, Instagram, WhatsApp and Messenger. The company said in April these features each have more than 500 million daily users.

Facebook’s move into e-commerce via its Instagram and What’sApp apps could add billions of dollars to its revenue within a few years. According to a Bloomberg report, Facebook is moving a step closer to launching its long-delayed WhatsApp payments service in India after wrapping up an audit of related data practices. WhatsApp has substantial strengths including an Indian user base that’s estimated at more than 300 million.

Last month, Facebook said it is expanding its Watch service and has teamed up with global publishers to bring their content to the Watch platform. Deutsche Bank (DE:DBKGn) analysts believe that Watch could contribute $5 billion in revenues by 2021.

These growth initiatives are in addition to the company’s controversial cryptocurrency project, Libra, which is facing global resistance since it was announced last month. According to Facebook, the main purpose of Libra is to enable people to use and transfer money around the globe more cheaply than current options allow, adding Libra would be most useful in countries where banking options are scant and the home currency is volatile.

With this optimism, however, it would be naive to discount the risks of potential stringent regulations that may be facing social media companies in the coming months. Still, it’s also important to recognize that Facebook hasn’t lost its power and still has many options for growth.

Bottom Line

After a powerful rally this year, Facebook shares are just $10 away from the all-time high they hit last summer. Trading at nearly 21 times projected earnings for the next 12 months, the stock is still cheap if we take into account all the future growth drivers.

We believe that positive user growth and the company’s efforts to monetize its popular digital properties will help offset the financial impact that may come from future regulations. Investors should take advantage if there is any weakness in Facebook shares after the Q2 earnings report tomorrow.