What Happened:

Facebook announced earnings on October 30th, 2019 after markets closed and once again proved two things. First, no matter how many bad headlines surround it, the company's bottom line doesn't appear to suffer. Second, as long as it delivers on its bottom line, investors don't really care much about Facebook's role in current events. Facebook smashed earnings expectations, earning $2.12 a share.

On a more granular level, Facebook's daily active users (DAU) rose 9% from this quarter last year, roughly in line with expectations. Its average revenue per user (ARPU) rose to $7.22, topping expectations. Facebook's stock rose about 5% in after hours trading, though it has since settled down to around 2% higher than its pre-earnings level.

(Below is Investopedia's original earnings preview, published 10/25/19)

What to Look For:

From data privacy scandals to antitrust regulatory probes, it would be hard to find another company that has been at the center of more controversy in recent years than Facebook (FB). And yet, investors seem little swayed so long as the company continues to add to its monthly active users (MAU), and perhaps more importantly, average revenue per user (ARPU). Investors will be intently watching those two key metrics as Facebook issues its quarterly earnings report next week. Analysts are expecting earnings to rise on relatively modest revenue growth. 

Despite all the controversy, Facebook has seen its shares rise nearly 29.6% in the past year, more than double the pace of the broader market. Over its 15-year existence the company has grown its user base to about a quarter of the world’s population and has become the second most popular place to advertise online. The combination of active users and advertising revenue has helped push the company to a market capitalization of $531 billion, and investors will be looking to see if that value will rise even higher as Facebook reports earnings on October 30, 2019 for Q3 2019.

FB stock performance vs. S&P 500
Source: TradingView.

Analysts expect Facebook to report earnings of $1.90 per share, implying year-over-year (YOY) growth of 8.1%. The earnings growth will be driven by estimated Q3 revenue of $17.3 billion, 26.3% higher than the year ago period. For the entire 2019 fiscal year, Facebook is on track to post earnings per share (EPS) of $6.26 on revenue of $70.2 billion, according to analyst estimates. That would mean an annual EPS decline of 19.07%, the first year of negative EPS growth since 2012, the year of Facebook’s initial public offering (IPO).

The projection for negative annual earnings growth for 2019 reflects the negative YOY EPS growth in the first two quarters of the year, which are at least partly due to higher expenses from increased investment in security measures. Second quarter EPS of $0.91 also reflected a one-time charge of $2 billion related to Facebook’s settlement with the Federal Trade Commission (FTC) and $1.1 billion in income tax expense. Without those expenses, Q2 EPS would have been $1.99, a 6.13% positive surprise above analyst estimates. Revenue is still growing but has trended downwards over the past several quarters to its slowest pace since the company went public. 

Facebook Key Metrics
  Estimate for Q3 2019 Q3 2018 Q3 2017
Earnings Per Share $1.90 $1.76 $1.59
Revenue (in billions) $17.34 $13.73 $10.33
Monthly Active Users (in billions) N/A 2.27 2.07
Average Revenue Per User N/A $6.09 $5.07
Source: YCharts, Facebook Investor Relations

The slower pace of revenue growth reflects a slowdown in the rate of increase of Facebook’s MAU, an indicator used by social networking companies to track the number of unique users who visit a site within a month-long period. Between Q3 2016 and Q3 2017, Facebook’s MAU grew 15.9%, but just 9.6% between Q3 2017 and Q3 2018. But slowing growth in users is expected considering there are only so many people living on the planet and Facebook has already reached a quarter of them.

Perhaps more important is the amount of revenue Facebook generates from each of its active users, a figure encapsulated by the ARPU metric. Between Q3 2017 and Q3 2018, Facebook increased its ARPU by 20.1%, and judging by the most recently released quarter, is on pace to repeat a similar level of growth. Increasing the ARPU over time is a sign that Facebook’s targeted ads are becoming increasingly efficient, and some think the company still has a lot more efficiency gains to be made. That’s helping drive the stock despite slowdowns in some of the other financial metrics.