Andrew Harrer/Bloomberg
Amid the ongoing fallout from the Cambridge Analytica scandal involving improperly handled Facebook Inc. member data, Chief Executive Mark Zuckerberg has said on several occasions that the company hasn’t seen a business impact. When Facebook reports first-quarter earnings Wednesday, Zuckerberg will have to prove it for the first time.
News of the Cambridge Analytica data usage broke in mid-March, which means any impact would be limited to about 20% of the reporting period — a significant amount of time but, as Zuckerberg has said, likely not enough to dramatically affect the financial results. To see any effect on Facebook’s core ad sales, in this quarter and beyond, investors will want to look for changes in ad sales and inventory.
Even though Facebook does not disclose the average cost per thousand impressions — a standard ad-industry metric for advertising pricing — the company does typically give investors percentage figures on how ad pricing and inventory changed in a quarter on the earnings call.
Because marketers and advertisers perceive Facebook’s inventory to be valuable, when the company restricts inventory, such as when it changed the news feed and reduced the amount of time spent on its site, ad prices go up, which can drive revenue growth.
If past performance is an indicator, when Facebook expands inventory, ad prices drop. If demand declines due to a backlash from advertisers sensitive to the data-privacy fears stoked by the Cambridge Analytica controversy, ad prices could decline — or not grow as fast — without a big addition to the amount of ad space it is selling.
In the fourth quarter of last year, impressions grew at 4% and ad prices went up 43%, compared with almost the opposite ratio the year earlier: ad impressions grew 49% and prices went up 3%. FactSet doesn’t have analyst predictions for these data points readily available, but if there is a dramatic change this quarter or in future quarters, investors should be wary.
Here’s what to expect
Earnings: On average, analysts polled by FactSet model first-quarter earnings of $1.35 a share. Contributors to Estimize, which crowdsources estimates from analysts, fund managers and academics, predict earnings of $1.46 a share.
Revenue: Analysts on average project first-quarter Facebook sales of $11.41 billion, with $10.11 billion in mobile revenue and desktop revenue of $1.21 billion, according to FactSet. Estimize is expecting sales of $11.57 billion.
Analysts predict average revenue per user of $5.35, though users in Canada and the U.S. are typically worth more than those elsewhere in the world. For example, in the fourth quarter, the average revenue per user in the U.S. and Canada was $26.76, compared with $8.86 in Europe and $2.54 in the Asia-Pacific region. The rest of the world brought in $1.86 per user, according to Facebook.
Stock movement: In the past three months, Facebook stock has dropped 11%, as the S&P 500 index has fallen 6%.
Of the 45 sell-side analysts who cover Facebook, 41 have the equivalent of a buy, two rate it a hold and two have a sell rating on the stock. The average price target is $216, which reflects 31% upside from Monday’s closing price of $166.
What to look for
Beyond any blowback from the data-privacy issue, the changes Facebook has been making to its platform will have a broad effect. Third-party developers, for example, must deal with additional reviews when asking for personal information from Facebook, which could impact some apps, Robert W. Baird & Co. analyst Colin Sebastian wrote in a note to clients Friday.
“With these new restrictions, we continue to believe there may be an impact to certain news/media/entertainment apps that use these services to reach audiences or improve their services,” wrote Sebastian, who rates Facebook a buy with a $210 price target.
Facebook’s growing security and safety team is also worth watching, as Zuckerberg has said the company is hiring in that area to eventually grow to 20,000 workers Since most of Facebook’s operating expenses are related to payroll, this will be most apparent in its operating margins, Barclays analyst Ross Sandler wrote.
“Most of the [revenue] growth will likely come from price (eCPM) once again in 1Q as impression growth continues to lag in the mid-single digits, similar to western market DAU growth and up against declining engagement,” wrote Sandler.
Sandler, who has a buy on the stock with a $225 price target, also wrote that advertisers interested in direct response are making buying decisions based on returns and not headlines surrounding the “Facebook is bad for society” narrative.
Moness Crespi Hardt analyst Brian White wrote in a note to clients Friday that his team will be watching Facebook’s daily-active-user count closely.
“During 4Q17, Facebook experienced the first sequential decline in U.S. & Canada DAUs, causing concerns amongst investors,” he wrote, adding that he expects there to be some impact on DAUs in the first and second quarter of 2018 due to the Cambridge Analytica data issues. Most of that impact, White wrote, will be concentrated in the U.S. and Canada.
White has a buy rating on the stock with a $200 price target.
With the stock suffering from its most significant decline in years, Canaccord Genuity analyst Michael Graham wrote that at current prices, it looks like an even more compelling buy. Graham has a buy rating with a $240 price target.