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Facebook earnings preview

Facebook announce their second-quarter results tonight after the close in New York, at 9pm (UK time). 

Its shares have soared since the start of the year, from $115.00 toward $165.00. Expectations for growth have ramped up dramatically, but at the same time, valuations have been supported by fundamentals.

Last quarter, Facebook reported adjusted earnings per shares (EPS) of $1.35 on sales of $8.0B. Earnings beat the market expectations by 21.5%, while sales were 2.5% better than expected. This time around, Facebook is expected to report adjusted EPS of $1.39 and sales of $9.2B. If achieved, these levels would represent growth of 43% over year, which would be similar to the current 43.5x trailing price-earnings (P/E) and above the 32.5x street forecast P/E. 

A big rally into the last quarter’s results priced in the positive surprise, and the shares spent two months after the report consolidating mainly between $145 and $165. The recent surge in the share price suggests that once again, strong expectations are getting built in and it could take a lot to get the shares to rally further.

The first-quarter results showed that average revenue per user in the US and Canada dropped by 13.8% - its largest quarterly drop in over two years. The average revenue per user on a world-wide basis fell by 12.4% in the first-quarter when compared with the fourth-quarter of last year.

Traders will want to see if this is the start of a trend lower or just a cooling off after a relatively large jump from the fourth-quarter in 2016 to the first-quarter in 2017.

Daily watch time of live videos was up 300% from last year, and this will be an area to pay attention to because video content is becoming a much bigger part of how information is consumed. Videos are eating into written content’s share.

Facebook has pledged to beef up its headcount in order to strip out improper material from the social media site, and that should help with its revenue, as companies will feel more confident using the site for advertising.

The chief financial officer, David Wehner, cautioned the market by saying that ad load may ‘come down meaningfully’ after the middle of 2017. Traders will be keeping an eye for forecasts in relation to ads for the remainder of the year.

The share price hit another record high this week, and momentum is with the bulls. Investors will be looking to $170. Should we see any pullbacks, the stock could find support at $144.60. 


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