Blogs -What Everyone Should Know Before Facebook’s Q3 Earnings Call

What Everyone Should Know Before Facebook’s Q3 Earnings Call


October 30, 2018

author

Beth Kindig

Lead Tech Analyst

Facebook’s earnings call today may be the most anticipated call of Q3. The stock has tumbled since the last quarterly earnings call from a high of $217 in July to a low of $142. Three months ago, Street analysts did not think this was possible – and many still have price targets at $200. I believe bullish financial analysts are distracted by Facebook’s security costs, news feed fatigue and Instagram while underestimating the most important number on Facebook’s earnings call tomorrow –user growth rate.

Background on Facebook’s User Growth Trajectory

Facebook’s rampant growth from 2004-2017 was due to a viral coefficient formula which is also known as the k-factor. The k-factor equation was taken from epidemiology, in which a virus that has a k-factor greater than 1 indicates exponential growth. The equation for virality for websites and applications describes the growth rate:

k = i * c

i = number of invites
C = conversion rate

When K is equal to one or greater, you have viral growth.

Facebook’s growth rate trajectory was exponential because people found the network more rewarding when more people they knew joined the network. The same will be true for Facebook’s deceleration, as well. As people start to spend less time on the social network, there will be viral deceleration.

To illustrate, a loss of 1 million users in the United States to Facebook is not a 1:1 loss, like it would be for Netflix or Google, where users are isolated from each other in a “silo.”

  • If I stop using Google, your search results are not affected.
  • If I stop using Netflix, your programming choices are not affected.
  • Even Twitter can withstand user loss as the platform is not based on a reciprocal following structure. This is why a celebrity can have 60 million followers, yet only follow 135 people in return.

If 1 million users close their Facebook accounts in the United States, however, it will be subject to a negative k-factor. These 1 million people who delete their accounts weaken the content on the platform for the 50 million-500 million people who were connected to them (assuming each user has at least 100 friends and some are inter-connected).

Now, if 2 million of the subsequent 50-500 million start to use Facebook less due to the impact the original 1 million had, then another 500 million to 1 billion will have a less enjoyable experience, which will reduce time on site. If 5 million from those 500 million find the platform less interesting because their favorite people have left the platform, the affects will continue to spiral.

My newsletter subscribers get this information first. Sign up here.

This is why Snap has been a popular short. Snapchat continues to lose daily active users on a quarter-over-quarter basis in North America and Europe. Only last May, Snap began to report a sinking growth rate of 2.13 percent – which was its slowest ever at the time compared to 5 percent in Q4 2017. See below for how Facebook’s user growth rate compares.

It should be noted that this was once Facebook’s strength and Twitter’s weakness. New users on Facebook had a low barrier to entry because total friend count grew relative to how much you reciprocate and follow back. Twitter, on the other hand, has had a tough time attracting new users because there is no reciprocation.

Facebook Reported Slowest-ever User Growth Rate in Q2 2018

The viral-coefficient-in-the-reverse explains why the most important metric for investors to pay attention to in Facebook’s earnings report is the user growth rate. Last quarter, Facebook’s monthly user count grew 1.54 percent compared to 3.14 last quarter. Daily active users grew even slower at 1.44 percent, compared to 3.42 percent last quarter. Previously, the slowest daily active user growth rate was 2.18 percent in Q4 2017. If this number becomes stagnant, the social media platform can decelerate very quickly. This is also why it’s possible for Facebook to report strong earnings and there still be a sell-off. If and when this number goes into the red, Facebook will have reached its peak as a social media platform –and profits will soon follow this trailing decline.

Disclosure: I shorted this stock in April of 2018 and have a put option on this stock as of October 2018 as I expect the user growth rates to continue to decline in the near future. Readers should also note these declines are more likely to occur in high average revenue per user markets (ARPU) such as the United States, Canada, and in Europe.

Read more analysis on how I predicted Facebook earnings prior to Q2 and analyzed Facebook would face GDPR trouble following Q1 2018 here.

I consult for financial firms. Inquire here.

Gains of up to 485% from our Free Newsletter.


Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!

+370% on Nvidia

+485% on Bitcoin

*as of May 02, 2024

Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.

If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 2583% on Nvidia, 806% on Chainlink, and 665% on Bitcoin. The I/O Fund is audited annually to prove it’s one of the best-performing Funds on the market, with returns that beat Wall Street funds.

beth

More To Explore

Newsletter

Amazon Building

Amazon Stock: Nearing $2 Trillion Club From AWS Growth & Ads Catalyst

Amazon is on the verge of joining the $2 Trillion Club, driven by a 4-percentage point accelerating in AWS to 17% YoY growth combined with strong 25% growth in advertising revenue.

May 21, 2024
Big Tech Logos

Big Tech Q1 Earnings: AI Capex Increases As AI-Related Gains Continue

Recent Q1 earnings releases from Microsoft, Amazon, Alphabet and Meta reaffirmed that AI spending is continuing to increase through 2024 as companies seek AI-related revenue gains.

May 14, 2024
The Risk is Higher in the Market than it Feels

The Risk is Higher in the Market than it Feels

In this report, we will show that the sentiment readings over the last several months suggest investors should be cautious. This is backed up by our broad market analysis, which indicates that risk is

May 02, 2024
We Are Raising Our Bitcoin Targets To $106K - $190K

We Are Raising Our Bitcoin Targets To $106K - $190K

Bitcoin is an asset where the bulls pound the table to “buy, buy, buy,” and the bears relentlessly and stubbornly call it a scam. In reality, both are the wrong approach. This is because although Bitc

April 26, 2024
Investing In AI with Beth Kindig: 1-Hour Video Interview

Investing In AI with Beth Kindig: 1-Hour Video Interview

Jordi Visser, CIO and Chairman of Weiss Multi-Strategy Advisers, spoke to Beth Kindig on the Real Vision podcast on March 20th, to dive deep into AI’s potential for explosive economic growth, how to f

April 19, 2024
https://images.prismic.io/bethtechnology/Zh50DEaI3ufuUONy_SemiconductorStocksQ4OverviewAIGainsHeatUp.jpg?auto=format,compress

Semiconductor Stocks Q4 Overview: AI Gains Heat Up

Semiconductor stocks are standout performers so far in 2024, with investor appetite for AI stocks remaining elevated as AI chip leader Nvidia continues its streak of high growth.

April 15, 2024
I/O Fund Catapults to 131% Cumulative Performance Due to Leading AI Allocation

I/O Fund Catapults to 131% Cumulative Performance Due to Leading AI Allocation: Official Press Release

I/O Fund, a tech research site that actively manages a real-time portfolio, announces returns of 57% in 2023 with a cumulative return of 131% since inception. This compares to popular tech ETFs that h

April 03, 2024
The Importance of Verified Returns and Risk Management for Retail Investors

Verified Returns & Risk Management: A Retail Investor's Imperative

Last year was a stellar year for investors – in 2023, the Nasdaq 100 rose 54% for its best annual return since 1999, while the S&P 500 gained 24%. The Magnificent 7 were the de facto leaders of this m

March 27, 2024
ARM Building

Arm Stock: AI Chip Favorite Is Overpriced

Arm Holdings is positioned to capitalize on the growing adoption of artificial intelligence (AI) technologies, leveraging its established licensing model and extensive ecosystem to drive future growth

March 26, 2024
Meta Building Picture

Top 3 Ad-Tech Stocks For 2024

Ad spending growth is widely forecast to accelerate in 2024, after a challenging macro environment significantly dented budgets and growth in 2023. The US advertising market is already showing positiv

March 18, 2024
newsletter

Sign up for Analysis on
the Best Tech Stocks

https://bethtechnology.cdn.prismic.io/bethtechnology/e0a8f1ff-95b9-432c-a819-369b491ce051_Logo_Final_Transparent_IOFUND.svg
The I/O Fund specializes in tech growth stocks and offers in-depth research for Premium Members. Investors get access to a transparent portfolio, a forum, webinars, and real-time trade notifications. Sign up for Premium.

We are on social networks


Copyright © 2010 - 2024
Get Free Weekly Analysis on the Best Tech Stocks