Facebook (FB) Q3 earnings preview
Date – after-market 25 October 2021
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Volatility and movement
- The implied move for FB on the day of earnings is 5.6% (higher or lower). This is inline with the average absolute price change on the day of earnings of 5.2% over the past eight quarters
- Over the past 8 quarters shares have had a mixed reaction on the day of reporting, rallying 4 of past 8 announcements
- Going into earnings the 10-day realised volatility sits at 36%, a strong rise from the 12% level seen in mid-September. It is also one of the highest levels of volatility this year
- Short interest sits at $27.28m, which is 1.2% of free float
- Facebook has a beta of 0.98 with the S&P500, which means it tends have moves similar to that of the index.
Analysts review
Analysts have traditionally loved the FB business model and we can see the 12-month price target sits at $416, offering a potential return of 26%. Of the 60 analysts who cover the stock 80% have a ‘buy’ rating. We can see Q3 21 earnings-per-share (EPS) have been revised from $3.02 in March to now stand at $3.64 - the share price has led the change in earnings expectations. Is the move lower in the share price now reflective that we’ve seen peak earnings growth?
Earnings considerations
Facebook are a market darling when it comes to overdelivering vs consensus expectations, beating EPS, ETIBDA and sales in 8 of the past 8 quarters.
For Q3 21 expectations, the market is looking for:
- EPS of $3.64 (+22.6% YoY)
- Revenue of $29.38b (36.9%)
- Gross margins of 80.37%
- Free cash flow of $9.91b
- Return on equity of 28.83%
Looking ahead, traders will question how the quarterly numbers and guidance feed into consensus expectations for:
- 2021 full-year EPS of $15.82 (+30.9% YoY), 2022 EPS of $17.91
- 2021 revenue of $119.30 (38.8%), 2022 sales of $142.72b
- 2021 gross margins (GM) 80.85%, 2022 GM 80.42%
What to watch
After the focus on whistleblower Frances Haugen testimony, investors have lowered earnings expectations, perhaps not for Q3 but Q4. There's also concerns around the expense outlook, with some analysts expecting expenses to outpace revenue growth in 2022 – guidance on expenses could move the share price accordingly.
The market will also be keen to watch out for intel on headwinds derived from IOS ad targeting and any signs of revenue slowdown in the new year – there's no doubt that the rate of change in its key earnings metrics are slowing down, whether we’re looking at the quarters ahead or on an annualised basis.
We need to remember that FB is coming off some incredible comparison rates and while it has a loyal ad platform, if we want to see a stock that epitomises peak earnings growth, FB could be a good case study.
Technical set-up
(Source: Tradingview - Past performance is not indicative of future performance)
After breaking the March uptrend we’ve seen price finding sellers easy to come by, resulting in a 16.2% drawdown from the September peak. As we look ahead at Q3 earnings, the selling has abated and we’re seeing consolidating into $328. Although, having filled the gap into $338 the buyers don’t have the impetus to push for a higher high. More work is needed to enthuse the bulls and promote a better trending conditions. A break of $327/$322 sees price into $319 – the 50% retracement of the March to September run up. A test here and the market will be debating a move to $300, which given the fundamentals of the business would be an attractive entry point for investors.
Put Facebook on the radar, as this promises to be an insightful quarter for the tech heavyweight.
