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Will Decelerating Growth Continue When Facebook Reports Earnings?

By Danny Vena - Updated Apr 23, 2019 at 4:21PM

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Challenges remain for the social media giant.

Facebook (META 7.19%) has endured a stunning fall from grace over the past year. The Cambridge Analytica scandal was just the first in a seemingly endless series of missteps, mostly concerning users' data privacy and the role of bad actors on its platform. Most recently, Facebook has been dealing with slowing user growth, something the company has been signaling for some time. The combination of these factors and the recent market correction had caused Facebook's stock to lose as much as 40% of its value in the second half of 2018, though it has recently recouped some of those losses.

Facebook is scheduled to release the financial results of its just-completed fourth quarter on Wednesday, Jan. 30, after the market closes. Let's take a look at the company's third-quarter performance and its most recent forecast to see if they provide any insight into what investors can expect from the upcoming earnings report.

The back of a young man wearing a Facebook shirt working at a computer screen filled with code.

Image source: Facebook.

Decelerating revenue growth

For the third quarter, Facebook reported revenue of $13.7 billion, up 33% year over year. While this result might seem enviable, it missed analysts' consensus estimates of $13.78 billion and represents a rapid deceleration from the company's performance in the two previous sequential quarters, which produced year-over-year growth of 42% and 50%, respectively. Third quarter operating margins also took a hit against the prior-year quarter, declining 800 basis points from 50% to 42% of revenue. This resulted in diluted earnings per share of $1.76, an increase of just 11% compared to the prior-year quarter.

The biggest cause for the financial shortfall was slowing user growth. Monthly active users increased to 2.27 billion, up 9.6% year over year, while daily active users grew to 1.49 billion, up 9.3% against the comparable quarter. European users contracted for the second quarter in a row, which hurt overall user growth. Facebook updated how it counts existing users during the quarter, which also took a toll on aggregate numbers.

Expectations for the quarter

For the fourth quarter, Facebook didn't provide specific metrics, rather, it provided the following guidance. The company is expecting revenue growth to decelerate by a mid- to high-single-digit percentage, which would result in a decrease of 5% to 9% compared to the 33% growth it achieved in the third quarter.

Spending will also be higher, with full-year expenses growing between 50% and 55% compared with 2017 -- when spending topped $20.45 billion. Backing out the year-to-date expenses thus far puts fourth-quarter costs in a range of $8.84 to $9.87 billion. This would result in operating margins of between 40% and 46%, so there's a chance for sequential margin improvement.

While we don't want to get caught up in Wall Street's short-term mindset, knowing its expectations can provide context regarding investors' overall sentiment toward the company. Analysts' consensus estimates anticipate revenue of $16.4 billion, up 26% year over year, near the midpoint of management's guidance, and earnings per share of $2.19, an increase of 52% over the prior-year quarter. 

Investor takeaway

Challenges remain for Facebook and its investors. The company is continuing its ongoing battle with fake news and those who would seek to manipulate its users. The increase in spending is designed to address some of those issues. The slowing revenue growth will likely continue until user confidence is restored, which won't happen overnight. We'll know more when Facebook reports earnings on Wednesday.

Check out the latest Facebook earnings call transcript.

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