What Happened

Facebook reported earnings after markets closed on Jan. 29. It reported better-than-expected earnings and revenue, and its growth in monthly average users matched expectations. Despite this, its stock fell 6% in after-hours trading.

(Below is Investopedia's original earnings preview published on Jan. 22, 2020)

What to Look for

Despite posting soaring revenue gains thus far in 2019, the outlook for social media giant Facebook Inc. (FB) has been clouded by privacy issues, regulatory scrutiny, one-time charges, and reports of trouble surrounding the upcoming rollout of its Libra cryptocurrency. These concerns are why investors will focus more closely than ever on Facebook's key metrics -- Monthly Active Users (MAU) and average revenue per user (ARPU) -- when results are announced on January 29, 2020 for Q4 2019. Consensus estimates indicate that both metrics will show solid gains, along with more than 23% year-over-year (YOY) growth on revenue and more modest gains in quarterly diluted earnings per share (EPS). Facebook stock has posted a total return of more than 50% in the last 12 months, about double the S&P 500.

One Year Total Return for S&P 500 and Facebook
Source: TradingView.

For Q4, analysts predict Facebook will report diluted EPS of $2.49, an increase of 4.3% YOY. While this growth is more modest than the 20.5% YOY EPS growth in Q3, it is far above the quarterly EPS declines of 49.7% and 47.7% in Q1 and Q2, respectively. Facebook's revenue growth has been much steadier in the past year, with consistent YOY growth between 26% and 29% for each of the previous three quarters. Consensus estimates of $20.9 billion for Q4 would mark a 23.4% YOY increase, somewhat lower than YOY growth in the prior three quarters but still strong for a company of Facebook's size. All told, analysts estimate that Facebook will report annual revenue for 2019 of $70.5 billion, a 26.2% increase over the prior year, even as annual EPS of $6.35 marks a 16.2% YOY decline.

Facebook Key Metrics
  Estimate for Q4 2019 Q4 2018 Q4 2017
Earnings Per Share $2.49 $2.38 $1.44
Revenue (in billions) $20.9 $16.9 $13.0
Monthly Active Users (in billions) 2.5 2.3 2.1
Average Revenue Per User $8.44 $7.37 $6.18

Source: Visible Alpha

For Facebook, a key metric of success in spite of a series of tumultuous headlines in the past year is MAU. Social media companies and their investors point to this indicator as a means of tracking the number of unique individual users to visit a site within a one-month period. While Facebook has seen steady MAU growth, there has been a modest slowdown in the overall rate of increase based on analyst expectations of Q4 MAU. Between Q4 2017 and Q4 2018, Facebook's MAU grew by 9.5%, while the figure is expected to climb by 8.7% from Q4 2018 to Q4 2019. The rate of increase from Q3 2019 to the most recent quarter could be even smaller, with an estimated 4.2% growth from 2.4 billion MAU to 2.5 billion MAU. To some degree, this is to be expected, given that Facebook already has a tremendously broad reach globally and that there are a finite number of potential users in the world.

What may be more important is the average revenue that Facebook is able to generate from each active user, or ARPU. From Q4 2017 to Q4 2018 ARPU grew by 19.3%, and the growth rate from Q4 2018 to Q4 2019 is anticipated to be 14.5%. ARPU may also be experiencing a slowdown in the overall rate of increase, but it is growing faster than MAU. Successful growth in ARPU could indicate that Facebook is making good on its goals of generating revenue from users in low-ARPU developing countries, and that the company is becoming more efficient in its use of targeted advertisements.