Last Minute Thought: Buy or Sell Facebook (FB) Stock Before Fiscal 4Q18 Earnings?


All good parties must come to an end, right?

That’s what investors and analysts are thinking ahead of Facebook’s (FB) earnings release at the end of day today. While the company has produced incredible results every quarter since it went public in 2012, the concern today is about growth — specifically, slowing growth. The social network giant had shown slowing growth in its Q3 results released three months ago, and analysts expect this to continue with today’s release. Making matters worse, monthly active users — a key metric for internet and social media companies — continues to slow, even as the company continues to near 2.3 billion users.

However, despite growth concerns, SunTrust analyst Youssef Squali remains bullish on the stock, reiterating his Buy rating and $200 price target, which implies nearly 34% upside from current levels. 

Squali says he is “modeling for Facebook to show material deceleration of its ad revenues in 4Q18 as 1) the company continues to push users and marketers towards Stories, the under-monetized area of the app, 2) GDPR continues to exert friction and 3) continuation of the effects of negative headlines around data use and user privacy in the US.”

But the analyst seems optimistic about the ad market in general, which helps fuel his Buy rating. For example, Squali says that digital advertising company Kenshoo, found that “overall spend was up 31% y/y, representing a deceleration from 3Q18 growth of 40% and 4Q17 of 39% (driven by 8% y/y growth in clicks and a 15% y/y growth in impressions).” Squali points out that the Kenshoo’s most notable conclusions were “that 1) core Facebook growth had decelerated but was up a solid 24% y/y nonetheless; and 2) Instagram is driving a larger percentage of the growth.”

Facebook is seen to be increasing focus on generating revenue from its non-namesake platform. Instagram and WhatsApp, for example, are used by more than 1 billion people each. As the analyst pointed out, core Facebook revenue is decelerating, which is adding pressure on its other two large services. While still a burgeoning revenue-generating segment, Instagram is showing solid growth in ad revenue. WhatsApp, for its part, is still at the beginning stages of figuring out the best way to generate revenue.

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Youssef Squali has a yearly average return of 17.9% and a 64% success rate. Squali is ranked #70 out of 5,129 analysts.

Facebook still faces a number of challenges in 2019, most of which are not quantifiable. Privacy scandals and Congressional hearings highlighted its 2018, and shows no signs of letting up as legislators continue to discuss how to regulate social media giants. Nevertheless, Wall Street analysts are still confident in the company moving forward. TipRanks analysis of 42 analysts, shows a consensus Moderate Buy; of the 41 analysts, 32 recommend Buy, while 6 say Hold and 3 are selling. There is an average price target of $180.63, which represents a 22% upside. (See FB’s price targets and analyst ratings on TipRanks)