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A cloud of uncertainty over Facebook earnings

The central bullish thesis for Facebook is that it remains the largest and most popular social networking website on the planet. The company has several revenue segments with most of the focus is on targeted advertising.

Facebook’s targeted advertising model, which was firing on all cylinders, took a huge public relations hit in the wake of the Cambridge Analytica scandal.  Facebook users are waking up to the idea that they are the product Facebook is selling to its advertiser clients. Facebook partnering with application developers is now under scrutiny. These partnerships are integral to Facebook because they add the functionality that keeps users interested. The political fallout from the data scandal is likely to perpetuate for a few quarters at a minimum. How long it lasts beyond that may depend on how well management wrestles with changes that allow users to protect their personal information.

Handling the Scandal

The initial reaction by Facebook was silence, but it now appears that CEO Mark Zuckerberg is trying to get ahead of the curve. For stock owners, it could pay to head the words of the CEO that “actions taken to strengthen user privacy will weigh on the company's profitability”.

This scandal has attracted the unwanted attention of Congress. Zuckerberg testified in front of the House and the Senate, and regulatory action will eventually come out of this situation. Facebook will continue to make compliance strides, but another large-scale breach could do serious damage to medium-term prospects. Recall, when Microsoft was sued by the EU, its stock price was stagnant for nearly 10-years.

Zuckerberg has always preached that the satisfaction of the customer experience is the most important goal of the company.  For the moment, Facebook users believe him, but any meaningful defection of U.S. users could materially impact the company's business model. Increasingly of note, Facebook derives about 55% of its revenue from outside the U.S. and Canada where the regulatory screws are being tightened at a quicker pace.

The price of Facebook shares have rebounded over 10% since hitting their April lows, but there is potentially still value to be found. The stock has significantly underperformed the ICE FANG index (an index created by the Intercontinental Exchange that includes 10 liquid stocks which include the top innovators in the technology, internet, and media space).

The Numbers

Facebook is scheduled to release its financial results on April 25, 2018. The company is expected to earn $1.36 a share, which is the average of the 36-analysts that cover the social media giant. The range of estimated EPS is $1.04 to $1.58. The company is expected to produce revenue of 11.41 billion. The range is $10.59 billion to $11.83 billion. Earnings estimates increased by approximately 9% over the past 90 days but are down slightly by less than 1% over the past 60 days.

Even if it produces blow out numbers, it will be hard for Facebook to escape the cloud of uncertainty in the short-term.

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