Facebook profit example: profit beat could lead to stock despite regulatory probes

* Reports Q3 2019 results on Wednesday, October 30 after closure

* Revenue expectation: $ 17.36 billion

* EPS expectation: $ 1.9

When social media giant Facebook Inc (NASDAQ 🙂 reports tomorrow in the third quarter, it must demonstrate that it is able to balance the slowing growth on its main platform by luring users to its other digital features.

This is a challenging task that will ultimately show whether Facebook is a good or bad investment. It is no secret that the company finds it difficult to attract more users to its main social network, the so-called "big blue app"

The number of daily users of the social network Facebook and the FB Messenger app rose to 1.6 billion people in the second quarter, an increase of 8% over the period a year ago. That percentage was the second slowest in the company's history.

In Europe, the US and Canada – which together generate about three-quarters of Facebook's quarterly revenue – user numbers have not changed for about two years.

This delay has not yet had a significant impact on sales, but it could happen at some point if CEO Mark Zuckerberg shows no progress in generating revenue with Facebook & # 39; s other social media assets, such as Instagram and WhatsApp. Fortunately, there are clear signs that Zuckerberg's plan to diversify the company's revenue base is on track.

Upbeat profit expectations

Although growth in the main Facebook app has slowed down, the company is still quickly adding users to other features. In total, 2.7 billion people use at least one app owned by Facebook – Facebook, Instagram, WhatsApp or FB Messenger – every month, making it & # 39; the world's largest social network.

Encouraged by this growth strategy, analysts generally have optimistic forecasts for the company's sales and profits. Facebook is likely to report $ 17.36 billion in sales tomorrow, an increase of around 26% compared to the same period a year ago, according to analysts' consensus forecast. Earnings per share increased by 8% to $ 1.9 versus $ 1.46 in the same period last year.

That said, the challenges for Facebook are pretty daunting. It is one of the top technology companies dealing with multiple regulatory tests focused on the platform's monopolistic power, potential for abuse, and the company's data practices.

The US Department of Justice is conducting an antitrust investigation by Facebook, while the Federal Trade Commission is also conducting a separate investigation into antitrust issues. Last week New York Attorney General Letitia James announced that 45 states – plus Guam and the District of Columbia – are investigating whether the company has harmed competition.

The fear of regulatory action has put Facebook shares under pressure in the past three months. At the end of Monday, the stock traded at $ 189.4, a decrease of around 5% since the end of July. But in our opinion another blow-out quarter will suffice to increase the stock again, which flirted with a new record high this summer.

Bottom Line

From now on there is no guarantee that the challenges for & # 39; the world's largest social media platform will disappear. In the last conference call with analysts in July, the company's finance director warned that Facebook's slowdown in revenue growth could extend this year because growing restrictions on the amount of personal information Facebook can collect and use for advertising will make it difficult to earn money through advertising sales.

Despite this difficult working environment and the warning tone of the company, the reality is that there is no other platform as powerful or global as Facebook is. We don't believe that power is declining, which is one of the main reasons why we continue to value Facebook shares, despite the ups and downs.

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