Social media giant Facebook (NASDAQ:FB) delivered strong Q1’19 results, which were well received by investors, who pushed the stock up nearly 7% this week.
Heading into the quarter, we anticipated that Facebook’s OpEx narrative could surprise to the upside as detailed in our quarterly earnings preview (detailed here). We explored the operating expense guidance and the heightened cost ramp, and whether the OpEx ramp would continue at such an aggressive rate – given the 40-50% OpEx growth outlook from Facebook’s Q4’18 earnings results.
Upon announcing earnings, Facebook clarified the cost ramp a little further:
In the first quarter of 2019, we reasonably estimated a probable loss and recorded an accrual of $3.0 billion in connection with the inquiry of the FTC into our platform and user data practices, which accrual is included in accrued expenses and other current liabilities on our condensed consolidated balance sheet. We estimate that the range of loss in this matter is $3.0 billion to $5.0 billion.
As such, Facebook’s earnings results were negatively impacted by this temporary charge, resulting in Q1’19 dil. EPS of $0.85 versus consensus expectations of $1.63, for the quarter. When adjusting out the impact from the accrual, the company would have reported dil. EPS of $1.89, beating consensus expectations of $1.63 for the quarter by $0.26. Furthermore, Facebook delivered a revenue beat in Q1’19, as the company reported revenue of $15.07 billion versus consensus expectations of $14.975 billion.
Notwithstanding some of the temporary weakness in earnings results, it’s worth noting that absent the impact from this one-time charge, Facebook would have reported earnings results at the high-end of the consensus estimate range.
Issues related to the European Union and the FTC were well-known prior the announcement of earnings, and with the impact fully quantified we can finally move past those dark days. Facebook priced-in these headwinds over the course of 2018, as both US and EU lawmakers put pressure on Facebook sending the stock price down to $123 (52-week low).
With the financials now reflecting the impact, investors and analysts are rolling forward estimates into FY’20 and FY’21 to justify forward valuations trending higher. Weak FY’19 comps will make FY’20 and FY’21 results look that much better.
Investors have another reason to cheer: UBS analyst Eric J. Sheridan has upgraded Facebook stock from “neutral” to “buy,” while boosting his price target from $170 to $240, which implies about 25% upside from current levels. Brian Nowak from Morgan Stanley also raised his price target in a note released on Thursday,
“FB’s across the board beat (revenue, free cashflow, EPS, users) speaks to its continued ability to drive monetization of its old (newsfeed) and new (Stories) engagement formats. Innovation (commerce, payments, video, messaging) will further extend its growth runway.
Other analysts share a similar enthusiasm when it comes to Facebook stock. TipRanks data shows out of 41 analysts, 37 are bullish and 4 are sidelined. With a consensus price target of $215.27, the potential upside is about 12% (See FB’s price targets and analyst ratings on TipRanks)
It’s certainly a stronger more cohesive narrative of addressing privacy than what we have witnessed in prior-years. Hence, Facebook’s not deaf to the reality of needing better privacy, but given the immense size of the organization, it took a little longer to get the narrative straightened out. It’s also going to cost a lot of money, but at this point, shareholders don’t care.
Investors are now better positioned following Q1’19 earnings, as much of the concerns tied to operating expenses, revenue growth, privacy and GDPR were addressed more directly with enough quantifiable figures to work with. As such, staying the course with Facebook makes sense here, as the stock still seems heavily undervalued on a relative basis to other tech peers when factoring growth, and scope of upside opportunity.