Key Takeaways

  • EPS was $1.80 vs the $1.77 analysts expected.
  • Revenue growth slowed but still surpassed expectations.
  • Monthly active users also beat estimates.

What Happened

Despite an antitrust investigation and a growing boycott from advertisers, Facebook managed to beat analysts' expectations across the board this quarter. Its earnings, revenue, and monthly active user numbers all surpassed expectations, despite growing more slowly than in previous quarters. Facebook's stock is up sharply in aftermarket trading.

(Below is Investopedia's original earnings preview, published July 28, 2020)

What to Look For

Facebook Inc. (FB) is facing one of the toughest periods of its 16-year history as hundreds of advertisers boycott the social media website amid heated criticism over hate speech posted on its platform. Even as Facebook's monthly active users (MAU) rise amid the COVID-19 pandemic, both the boycott and slowing economy could lead to falling advertising, Facebook's main revenue source. The boycott started at the end of June as Facebook already was grappling with the fallout of the pandemic.

Investors will be looking for the latest signs of how Facebook is weathering the pandemic when it reports earnings on July 30, 2020 for Q2 FY 2020. Analysts estimate the company's adjusted earnings per share (EPS) will decline as revenue growth slows considerably. While the impact of the boycott on Facebook's results will be limited since it started late in the quarter, investors will want to hear from management how the boycott affected revenue in July, the first month of the current quarter.

Investors also will be looking at Facebook's growth in MAU and average revenue per user (ARPU) in Q2. These two key metrics gauge the extent to which the company is attracting and retaining new users, and how well it is monetizing its user base mainly through attracting advertising. Analysts forecast MAU will rise while ARPU will decline for Q2.

Shares of Facebook were keeping pace with the broader market for most of the past year, crashing in tandem with the market this spring as fears mounted over the spread of the coronavirus. But Facebook has outperformed amid the market's rebound from the crash. The ad boycott led to a brief dip in late June. The stock has provided investors with a trailing total return of 19.2% over the past 12 months compared to the S&P 500's total return of 7.2%.

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

Facebook's shares received a boost following its Q1 FY 2020 earnings report, which appears to have quelled investors' fears over how the company would perform during the pandemic. Adjusted EPS rose 21.4%, marking the fastest growth since Q4 FY 2018. Revenue rose 17.6%, but it was the slowest growth in at least the past 17 quarters, continuing a deceleration that began years ago.

During Q4 FY 2019, Facebook's adjusted EPS rose 14.1%. Aside from two consecutive quarters of declining earnings in the first half of the year, it marked the slowest earnings growth in at least 16 quarters. Revenue grew 24.6%, just under half the rate at which revenue grew three years earlier in Q4 FY 2016. The company's shares fell on the news, then rebounded in the following weeks before plunging amid the coronavirus-induced market crash.

Facebook's shares have rebounded since the crash but they have moved mostly sideways since the end of May. For the coming Q2 FY 2020 report, analysts expect a 10.8% decline in adjusted EPS, which would be the worst earnings performance in at least 18 quarters. While EPS fell in two other quarters during that more than four-year period, the estimated decline in Q2 FY 2020 EPS is far steeper. Revenue is expected to grow 2.1%, the weakest quarterly performance in more than four years.

Facebook Key Metrics
  Estimate for Q2 2020 Q2 2019 Q2 2018
Adjusted Earnings Per Share ($) 1.77 1.99 2.09
Revenue ($B) 17.2 16.9 13.2
Monthly Active Users (B) 2.6 2.4 2.2
Average Revenue Per User ($) 6.66 7.05 5.97

Source: Visible Alpha

For social media companies like Facebook, monthly active users, or MAU, is a key indicator for tracking the number of unique individual users to visit a site in a one-month period. Facebook has seen steady MAU growth every quarter for at least the last three years. However, there has been a general slowdown in the rate of increase. Year-over-year (YOY) growth in MAU ranged between 15-17% over the four quarters of 2017, 9-14% during 2018, and 8-9% during 2019. Analysts estimate MAU will rise 9.4% in Q2 FY 2020, slightly above the average rate throughout the previous year. This above-average growth may stem from home-bound consumers worldwide sharply boosting their online activity due to the pandemic. Despite this short-term uptick, the overall pattern of slower growth is to be expected since Facebook already has a significant global reach and there are a finite number of potential users worldwide.

Just as important as MAU is how much revenue Facebook can generate from its users largely in the form of advertising, which is measured by average revenue per user, or ARPU. ARPU growth has also slowed in recent years, although the drop has been more dramatic. Growth in ARPU ranged between 24-28% during 2017, 19-31% during 2018, and 16-19% during 2019. That growth slowed to 8.4% in Q1 FY 2020. Now for Q2 FY 2020, analysts expect a decline of 5.6% in ARPU, the first quarterly decline in at least 16 quarters.