Please ensure Javascript is enabled for purposes of website accessibility

Did Facebook Close Out 2019 With a Bang or a Whimper?

By Danny Vena - Jan 27, 2020 at 3:35PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The social media giant was a star performer last year, but can it last?

Facebook (FB 3.86%) defied critics for much of last year. The social media giant suffered from an endless series of data privacy scandals, government investigations, regulatory fines, and even critical testimony on Capitol Hill. With all the negative press, you'd be tempted to think the stock would have had a tough year, but that simply wasn't the case. Facebook stock soared nearly 57% in 2019, far outpacing the 29% gains of the S&P 500.

Earnings season is kicking into high gear, and investors will be watching with keen interest when Facebook releases the financial results of its fourth-quarter earnings after the market close on Wednesday, Jan. 29. Let's look at several key factors that will determine the company's success or failure when Facebook reports.

A man wearing a Facebook T-shirt writing lines of code on a computer

Image source: Facebook.

Revenue deceleration?

Since early last year, Facebook has been warning investors that a deceleration in its revenue growth was imminent. When that didn't materialize last quarter, the stock continued its unrelenting climb. For the third quarter, revenue grew to $17.65 billion, up 29% year over year -- and accelerating from the 28% top-line growth in Q2 and 26% increase in Q1.

Management is still sounding the cautionary drumbeat, however; it expects that "our Q4 reported revenue growth rate will decelerate by mid- to high-single-digit percentage compared to our Q3 rate," with the slowing growth persisting into 2020. That would imply a growth rate of between 20% and 24% year over year in the fourth quarter. Analysts' consensus estimates are for revenue of $20.88 billion, which would represent growth of about 23%.

If the slowing growth eventually comes to pass, investors might have second thoughts about pushing the stock any higher.

Users are key

In the face of all its other difficulties, Facebook has shown the uncanny ability to continue its user growth despite ongoing challenges. By adding to and effectively monetizing its user base, Facebook has insulated itself somewhat from its other, more public issues. In the third quarter, the company increased its daily active users (DAUs) by 9% year over year, while monthly active users (MAUs) grew by 8%.

This has been a familiar refrain throughout 2019; DAUs and MAUs increased by 8% year over year in both the first and second quarters, before accelerating again in Q3. Continuing user growth has been a key component of the stock's resilience. Wall Street is expecting MAUs to increase 7% year over year to 2.49 billion this coming quarter.

Will spending take a toll?

Facebook has been spending heavily and increasing its employee count to secure the platform, manage misinformation, and protect user privacy, some of which was required as part of the company's settlement with the Federal Trade Commission (FTC). These steps will no doubt have a negative impact on Facebook's bottom line, weighing on both its margins and net income. On the Q3 conference call, Facebook's chief financial officer, Dave Wehner, said the company was expecting full-year expenses in a range of $46 billion to $48 billion. This would imply Q4 expenses of between $11.5 billion and $13.5 billion for the fourth quarter -- an increase of about 38% at the midpoint.

This will pressure the bottom line, as analysts' consensus estimates are calling for earnings per share of $2.52, or growth of about 6% year over year. This is a much lower growth rate than for revenue, which is expected to grow at 20% or more.

Facebook was one of the best-performing technology stocks of last year, but when it reports earnings this week, the company will have a high bar to clear.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
FB
$198.62 (3.86%) $7.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
345%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.