Facebook’s share price has dropped as the coronavirus hits ad revenues. What will be the full impact on Q1 earnings?
Facebook’s [FB] share price hasn't been immune from the coronavirus. Since the outbreak began the stock has dipped as traders grow skittish about the social media giant’s ad-reliant business model.
Sure there’s been an increase in daily visitors since the outbreak began, but companies have slashed their marketing spend. Considering Facebook is one of the world’s biggest advertising platforms that’s inevitably going to hurt revenues, and possibly hit the performance of a relatively resilient share price in first quarter of this year.
So what’s the impact on Facebook’s Q1 earnings, and how will the firm’s share price respond?
What's happening with Facebook's share price?
Facebook's share price is down over 12.8% this year. Like most other stocks it plummeted at the end of February as part of the coronavirus sell-off. However, since hitting its 52-week low on 16 March, the stock has rallied over 25%.
When is Facebook reporting Q1 earnings?
Why should investors care?
Ad revenue takes a hit
Facebook derives a colossal 98.5% of its revenue from advertising. But marketing managers are cutting advertising budgets in the wake of the coronavirus.
Facebook and Google could lose a combined $44 billion in advertising revenue this year, according to Cowen & Co. Cowen forecasts Facebook's ad revenue coming in at $67.8 billion for 2020, down $15.7 billion from the previous year.
Facebook's forecasted ad revenue for 2020 - $15.7bn less than last year
A drop in advertising shouldn't come as a surprise. In a blog post, Facebook said it has “seen a weakening in our ads business in countries taking aggressive actions to reduce the spread of COVID-19.”
While this might see some short-term movement in the share price, the long-term outlook is much better. Cowen expects Facebook's ad revenue to come back strong in 2021, in line with a wider economic recovery, to an estimated $83 billion.
Facebook inks biggest deal since WhatsApp
April saw Facebook take a $5.17 billion stake in Indian telecoms giant Jio. Bloomberg technology correspondent Kurt Wagner says that the deal is unique as Facebook usually acquires companies; it doesn't take stakes in them.
“Whatsapp is huge in India and Jio has a lot of reach to Indian small businesses and consumers," Wagner told Bloomberg Technology.
"And so you can imagine a world where WhatsApp is able to extend its reach through the Jio partnership and Jio gets a nice investment from Facebook.”
Facebook's stake in Jio
Wagner says it's unclear what Facebook is planning, but on the telecoms side, this would give it access to 400 million Jio internet users. Considering the size of the market in India, this could be a very lucrative tie-up.
What do the analysts expect?
Wall Street expects Facebook earnings to come in at $1.75 a share, up $0.85 from the same quarter last year. Revenue is expected at $17.52 billion, up 16.2% from last year.
Will Facebook beat analyst expectations? It’s done so twice in the past two quarters. However, Zacks notes that 'analysts have become bearish' on the social media giant recently. This has resulted in an earnings ESP of -3.75%, indicating a miss could be on the cards.
Facebook's expected revenue - a 16.2% rise from last year
Is Facebook a 'Buy'?
Of the 44 analysts tracing the stock on Yahoo Finance, 41 rate it either a Strong Buy or Buy. An average price target of $217.51 would see a 14% upside on the current share price. Last week both Mizuho and UBS maintained their Buy rating on the stock, while Credit Suisse rates it an Outperform.
Despite the drops in ad spend, Facebook is likely to still rake in billions this year. Cowen's forecast pegs Facebook’s operating income at a hefty $33.7 billion. For investors, Facebook could be trading at a discount.
|PE ratio (TTM)||28.45|
|Quarterly Revenue Growth (YoY)||24.60%|
Facebook's share price vitals, Yahoo Finance, 29 April 2020