Facebook's Earnings Report on Tuesday: 3 Top Things to Watch For
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All eyes will turn to Facebook (FB) - Get Report this week as the social network reports its latest quarterly earnings.
The drama has hardly slowed for the embattled tech giant, with recent bad news that included revelations on Friday of a new disinformation campaign, a September data breach affecting millions of accounts, allegations by advertisers that it hid inflated video metrics and a push by several large shareholders to oust CEO Mark Zuckerberg as chairman.
Since its last earnings report in July, which revealed missed revenue targets, slower-than-expected user growth and heavier spending on security and account fraud, Facebook's stock is down 33%. On Tuesday Oct. 30, when Facebook is due to report its third quarter earnings, here are a few key themes that investors will be looking out for.
TheStreet will be live blogging Facebook's earnings after the close on Oct. 30. Please check our home page then for more details.
1. Facebook's (Continued) Security Woes
If it seems like every week there's a new data breach, hack or report about shady dealings on the world's most popular social network, you're not alone. On Facebook's July earnings call, Zuckerberg admitted that the company's higher spending on mitigating such issues was finally having a material impact.
"We're investing so much in security that it will significantly impact our profitability," Zuckerberg said on a call with investors. "We're starting to see that this quarter." For Pivotal's Brian Wieser, the seemingly nonstop barrage of problems are a potential red flag that the spending could increase even further: "We're not doubting they can't be fixed, but the fact that problems keep emerging reinforces our view that the company is not as in control of its business as it needs to be," Wieser wrote in a recent note. "As problems are fixed, costs will rise, possibly faster than the company has anticipated (if only because the company is slow to acknowledge problems requiring fixing)."
In Facebook's third quarter report, the company might supply an update on its efforts while seeking to reassure investors that it's on the right track.
2. News Feed Fatigue
Though still a staple for digital advertisers, Facebook's main News Feed feels more like an albatross than a cash cow nowadays given issues such as fake news, sketchy political ads and wavering engagement rates. Investors will be looking for signals on how to interpret News Feed, which still represents the largest user base and advertising engine on Facebook at around two billion users worldwide.
As noted by Edgewater Research's Kevin Rottinghaus, Facebook is directing engineering resources to security issues that might otherwise be spent building new ad products. "This causes some medium/long-term concern as competitor platforms -- Twitter (TWTR) - Get Report , [Microsoft's (MSFT) - Get Report ] LinkedIn, Pinterest, Amazon (AMZN) - Get Report -- are noted as narrowing the gap and offering similar API/reporting/measurement capabilities as Facebook," he wrote.
With competitors looking to chip away at Facebook's dominance in digital advertising, investors will look for answers on the status of News Feed -- as well as other ways Facebook is innovating in its core business of advertising.
3. High Hopes for Instagram
Instagram hasn't been immune to its own form of turbulence, with founders Kevin Systrom and Mike Krieger announcing a sudden exit from the Facebook subsidiary in September. Still, the mega-popular photo sharing app is a darling for advertisers: Although Facebook doesn't give revenue breakouts for Instagram, an estimate from eMarketer placed its 2019 revenue at $10.9 billion. Facebook's other social apps, WhatsApp and Messenger, aren't monetized and are likely a long ways off from making significant amounts of money -- and that increases the pressure to ensure that Instagram can make up for any weaknesses.
There is room for optimism around Instagram, which may be under appreciated for its potential to drive commerce, according to Rosenblatt's Zgutowicz: "Commerce is another appealing aspect of IG that has slowly grown from simply tagging product photos, to a shopping destination from these photos that are now integrated with Stories," he wrote. "It is an important development not just for IG but for commerce broadly, which is witnessing the closure of a long-held gap between site and app driven commerce."
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