Market News & Analysis


Top Story

Facebook spending timeline in focus

Earnings are set to be robust, but will expenditure ease?

Facebook Inc. reports Q3 2019 earnings on Wednesday 30th October, after the U.S. market close

Epicentre of scrutiny

Facebook remains at the epicentre of growing regulatory threats that could eventually clip Big Tech’s wings, with CEO Mark Zuckerberg recently grilled by a high-profile Congressional committee as probes into whether FB and others are using their dominance to thwart competition gather pace. A record $5bn fine to settle U.S. claims that it repeatedly violated users’ privacy buffeted the stock even after a strong Q2. Facebook also faces antitrust and privacy probes in Europe.

Shares resilient

Despite all this, there’s been no clear chill detectable in investor appetite for Facebook shares of late. They’ve eased from a 30% ascent relative to the S&P 500 between the start of 2019 to July. But they were still outperforming the benchmark by 17.5% over the year to date on Wednesday. Boosted advertising sales growth on the back of Facebook Stories, that buoyed Q2, should remain evident in Q3, despite softer guidance. Rising video adoption and better-managed pricing volatility pose upside risks to forecasts. Instagram (now including Instagram TV) monetisation of which is still being incubated, also supports valuation multiples regardless of quarterly outcomes.

Spending Watch

One front where investor scrutiny of FB’s third and forthcoming quarters will be acute is expenditure. Like many Big Tech counterparts, the social media group has been pumping vast sums of cash into initiatives aimed at securing future growth and markets, getting ahead of rising global demand for better user health, privacy and security, as well as a likely more onerous regulatory environment in the years ahead. A risk of higher provisions for legal costs and settlements does not look particularly priced into the stock at present. Additionally, with free cash flow mostly negative for the last two years of intense investment, Wall Street is eyeing a return to cash generation in 2020.  

Investors are already primed for spending to show a fairly hefty ramp in the current financial year. However, Facebook could well signal a pause in the quantum of spending growth by tightening 2019 operating expenditure guidance from its current 37% to 45% range. But any hints from Wednesday’s report that Facebook’s expenditure story has further to run could take some of the shine off earnings-fuelled enthusiasm by the shares.

Low scale Libra concern

Aside from spending, investors continue to signal that other present or future headwinds are relatively immaterial. For instance, flake outs by high-profile corporate partners from Facebook’s cryptocurrency project, Libra, as well as strident opposition from central banks, are a headache, though not much more, for the moment.

Key estimates (consensus compiled by Bloomberg)

3Q adjusted EPS: $2.28, +8.5% year-on-year

3Q revenue: $17.35bn +26.4%

3Q daily active users: 1.6 billion, up 7.5% year-on-year

3Q monthly active users: 2.45 billion, up 7.6% year-on-year

3Q gross margin: 80.2%

4Q adjusted EPS: $2.92

4Q revenue: $20.94bn


Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.

Important Notice:

Cryptocurrencies are not legal tender currency and trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they do not have protection under the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks.