* Reports Q2 2019 results on Wednesday, July 24, after the closing
* Revenue forecast: $ 16.5 billion
* EPS expectation: $ 1.87
Facebook (NASDAQ:) The gradual recovery of the shares since December has been spectacular. It clearly shows that despite regulatory investigations, fines and general distrust, advertisers have no alternative as powerful as Facebook to reach their customers.
Facebook shares have risen by more than 60% since the December 24 low for $ 202.32. This strong recovery comes after a tumultuous 2018, in which equities fell 26%, which reduced investor confidence with a number of high-profile setbacks, including data breaches, concerns about user privacy and political manipulation of the platform.
At the beginning of this month, Facebook arranged with the US regulator by agreeing to pay a $ 5 billion fine for solving the Cambridge Analytica data scandal. Although details of the settlement with the US Federal Trade Commission were not announced, the fine is steep, but far from devastating for Facebook. The company, which reported sales of nearly $ 56 billion in 2018, had set aside $ 3 billion in anticipation of the fine.
While these issues continue to pose a major challenge to the future growth of social media companies as politicians and regulators seek to establish a set of rules to control and combat abuse, investors are becoming more self-assured about the ability of CEO Mark Zuckerberg to produce competitive returns even in this unfavorable business environment.
Facebook will have $ 16.5 billion in revenue tomorrow, an increase of around 25% compared to the same period a year ago, according to analysts' consensus forecast. Earnings per share increased by 7% to $ 1.87.
New Growth Engines
What makes investors enthusiastic about Facebook's prospects is the ability to continue to attract advertising dollars with its 2.7 billion users on different platforms. In our opinion, this optimism stems from the fact that Facebook, which manages & # 39; the world's largest social communities and messaging services, including Instagram and WhatsApp, is still as valuable to advertisers as it was before all controversies and scandals broke out.
The Stories functions of the company are an important growth area for Facebook. These are full screen photos & videos & # 39; s that users can post to Facebook, Instagram, WhatsApp and Messenger. The company said in April that these functions each have more than 500 million daily users.
Facebook & # 39; s switch to 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 payment service in India after completing an audit of related data practices. WhatsApp has considerable strengths, including an Indian user base that is estimated to exceed 300 million.
Facebook said last month that it is expanding its Watch service and has partnered with global publishers to bring their content to the Watch platform. Deutsche Bank (DE 🙂 analysts believe that by 2021, Watch could contribute $ 5 billion in revenue.
These growth initiatives come on top of the company's controversial cryptocurrency project, Libra, which has been facing worldwide since it was last announced month. According to Facebook, the main purpose of Libra is to enable people around the world to use and transfer money cheaper than the current options allow, adding Libra would be most useful in countries where bank options are scarce and their own currency is volatile.
With this optimism, however, it would be naive to ignore the risks of potentially strict regulation that social media may face in the coming months. Yet it is also important to recognize that Facebook has not lost its power and still has many options for growth.
Bottom Line
After a powerful rally this year, Facebook shares are only $ 10 removed from the record high they achieved last summer. Trading with nearly 21 times expected profit for the next 12 months, the stock is still cheap if we take into account all future growth factors.
We believe that positive user growth and the company's efforts to make money with its popular digital features can offset the financial impact of future regulation. Investors should benefit if there is any weakness in Facebook shares after the Q2 earnings report tomorrow.
