Facebook (FB) is scheduled to report results of its first fiscal quarter after market close on April 24, with a conference call scheduled for 5 pm ET.
What to watch for:
1. STRATEGY PIVOT: Mark Zuckerberg, the chairman and CEO of Facebook, said on March 6 that the company will encrypt conversations on more of its messaging services and make them compatible, providing another signal that the social network sees its future in private online chats. In a post to his personal Facebook page, Zuckerberg said Facebook will also develop products like payments and e-commerce within its messaging services, which include Messenger, Instagram and WhatsApp, that eventually could allow it to diversify from the ad-supported business model that led to a number of privacy scandals. Subsequently, on March 19, Instagram announced in a blog post that it is adding in-app checkout, which it said "makes it quick and secure for people to buy the products they discover on Instagram." Afterward, Deutsche Bank analyst Lloyd Walmsley told investors that he thinks a more streamlined e-commerce experience on Instagram could add an incremental $10B of revenue in 2021 for Facebook. He sees "Checkout with Instagram" as a key step towards unlocking this opportunity. After speaking with a large brand trying it out and a Facebook marketing partner, the analyst said he was "excited" on Facebook's e-commerce opportunity for Instagram. Walmsley, who thinks Checkout with Instagram can drive monetization, kept a Buy rating on Facebook.
2. ACTIVE USER GROWTH: Last quarter, Facebook said daily active users were 1.52B on average for December 2018, an increase of 9% year-over-year; Monthly active users were 2.32B as of December 31, 2018, an increase of 9% year-over-year. Those figures compare to a DAU increase of 9% year-over-year and MAU increase of 10% year-over-year reported in Q3.
3. NEW ZEALAND ATTACKS: On March 15, dozens of people were killed in shootings at two mosques in the city of Christchurch, New Zealand, and one of the shooters livestreamed the attack on Facebook. After the event, Guy Rosen, Facebook's VP for integrity, said the company's artificial intelligence tools failed to catch a video of the shootings aired live on the platform by the shooter and the video wasn't prioritized for accelerated review after being flagged because accelerated reviews focus on reports of suicide attempts, the Wall Street Journal's Niharika Mandhana reported. Subsequently, Needham analyst Laura Martin downgraded Facebook to Hold from Buy citing three factors that she sees creating a "negative network effect," namely its strategic pivot toward privacy and encrypted messages, the growing risks of regulation and "horrific" events like those in New Zealand that hurt Facebook's brand and are difficult to block from the service at a 100% level. She is concerned that strategic pivot, regulatory and headline risks will negatively impact Facebook's valuation more than investors currently believe due to the negative flywheel effect of these factors influencing the exit of more executives, Martin told investors. Since she believes people are a key competitive advantage of "FAANG" companies, Martin is concerned about accelerating value destruction until senior executive turnover ends, she noted in her downgrade.
4. SECURITY SNAFUS, OUTAGES: In late March, Facebook's VP Engineering, Security and Privacy, Pedro Canahuati, stated in a post to the company's investor relations site: "As part of a routine security review in January, we found that some user passwords were being stored in a readable format within our internal data storage systems...We have fixed these issues and as a precaution we will be notifying everyone whose passwords we have found were stored in this way." In an updated blog post on April 18, Facebook said that since the original post had been published it discovered additional logs of Instagram passwords being stored in a readable format. "We now estimate that this issue impacted millions of Instagram users," the company said. "We will be notifying these users as we did the others. Our investigation has determined that these stored passwords were not internally abused or improperly accessed." On April 14, Bloomberg's Olivia Carville reported that Facebook had suffered its third major outage this year, with users across the world unable to access the social network or its suite of services. Facebook and Instagram were inaccessible for several hours with both sites refusing to refresh, while messages were unable to be sent or received in WhatsApp or the Messenger app, the author noted at the time.
5. UPGRADES: On March 11, Nomura Instinet analyst Mark Kelley upgraded Facebook to Buy from Neutral and raised his price target for the shares to $215 from $172. Facebook's transition to Stories appears to be occurring more quickly than expected, Kelley said. As such, the analyst said his concerns over engagement trends at core Facebook have eased. Given management's original commentary that operating margins would trend towards the mid-30% range over "the next several years," and considering guidance for 2019 expense growth essentially equates to 35%-36% operating margins right out of the gate, the expense growth outlook may be tempered as we progress throughout the year, according to Kelley. Further, he continues to believe that increased regulation will be a net positive for large platforms like Facebook. On April 4, Guggenheim analyst Michael Morris upgraded Facebook to Buy from Neutral and raised his price target for the shares to $200 from $175. Investors will continue to gain comfort with the incremental financial risk created by Facebook's content and privacy concerns, Morris told investors. Further, the analyst believes the company's usage trends have remained "solid" and sees the potential for commerce and messaging monetization opportunities "as attractively priced within shares." Morris expects Facebook shares to outperform his broader Media & Entertainment coverage given its "above-average growth rate at a modest premium to overall market valuation." As of the time of this writing, the consensus 12-month price target among 43 research firms that have updated their targets within the last three months is a bit below $198 per Facebook share, according to Bloomberg data.