Key Takeaways

  • EPS was $2.71 vs. the $1.91 analysts expected.
  • Revenue exceeded analyst expectations.
  • Monthly active users were slightly higher than the level estimated by analysts.
  • Acceleration of shift to online commerce amid pandemic is helping to drive advertising revenue.

What Happened

Facebook reported EPS in Q3 2020 that was significantly higher than what analysts expected. Robust growth also drove revenue well above expectations. Monthly active users were higher than forecasted and rose 12% compared to the year-ago quarter. Facebook noted that the COVID-19 pandemic is driving an acceleration of commerce from offline to online as the company experienced increasing demand for advertising. However, the company still faces a significant amount of uncertainty in 2021.

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

What to Look For

Facebook Inc. (FB) stock has risen about 90% off its March lows in 2020 as the world's largest social networking company has faced two opposing forces. The company's user engagement has risen as people spend more time online amid the COVID-19 pandemic. Meanwhile, more than 1,000 companies slashed their ad spending by millions of dollars in July -- the first month of Q3 -- to protest how Facebook has addressed hate speech on its platform.

Investors will watch to see how these and other forces affect Facebook's financial results when the company reports earnings on October 29, 2020 for Q3 FY 2020. Analysts expect earnings per share (EPS) to decline and revenue to rise, but at a sharply slower pace compared to the same quarter a year ago.

Despite that mixed forecast, analysts expect robust growth in a key metric: Facebook's monthly active users (MAU). The gain is consistent with the rise in online activity during the pandemic. MAU is a key gauge of user engagement on digital platforms.

Shares of Facebook were keeping pace with the broader market for the first half of the past year. But they have dramatically outperformed during the second half even though the stock has pulled back slightly since late August. The company's shares have provided a total return of 46.9% over the past 12 months, well above the S&P 500's total return of 14.3%, as of October 21, 2020.

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

Facebook's stock jumped after releasing its Q2 FY 2020 earnings report. EPS rose 98% year over year (YOY). Revenue was up 10.7%, its slowest pace in at least 14 quarters. Facebook said that it expected YOY revenue growth for Q3 to be roughly in-line with Q2, despite macroeconomic uncertainties and the ad boycott.

The company's stock also rose after reporting Q1 FY 2020 earnings and has significantly outpaced the rest of the market ever since. EPS grew 102%, its fastest pace since Q4 FY 2016. Revenue rose 17.7%, below the nearly 27% average growth rate during the preceding four quarters.

Analysts expect EPS in Q3 FY 2020 to fall 9.8%, which would mark the first decline since Q2 FY 2019. However, revenue is expected to rise 12.0% YOY, slightly faster than the growth rate posted in Q2. For full-year 2020, analysts forecast EPS and revenue to rise 25.3% and 13.6%, respectively. It would be the slowest pace of revenue growth in at least the past six years.

Facebook Key Metrics
  Estimate for Q3 2020 (FY) Q3 2019 (FY) Q3 2018 (FY)
Earnings Per Share ($) 1.91 2.12 1.76
Revenue ($B) 19.8 17.7 13.7
Monthly Active Users (B) 2.7 2.4 2.3

Source: Visible Alpha

As mentioned, investors will look closely at Facebook's MAU, which is 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, for example, slowed from 17.2% in Q2 FY 2017 to 8.1% in Q2 FY 2019. It slowed again to a recent low of 7.6% in Q4 FY 2019. MAU growth accelerated in Q1 and Q2 of 2020. Analysts expect MAU to rise 10.2% in Q3 FY 2020, a couple percentage points above the average growth for the four quarters of 2019.

Despite this short-term uptick, the overall pattern of slower growth is to be expected. Since Facebook already has a significant global reach, there is a finite number of potential users worldwide. Thus, as growth in total users slows, investors also look closely at how well Facebook is increasing its average revenue per user (ARPU). This metric shows how much revenue Facebook is generating from each of its active users. ARPU declined 1.1% YOY to $6.92 in Q2 FY 2020. While the level was high relative to the average over the past three years, it was the first year-over-year decline in at least 14 quarters. Analysts expect ARPU to rise 1.7% to $7.33 in Q3 FY 2020.