Wall Street is expecting Facebook to post another blowout quarter -- but analysts are worried about fake news and other problems

Paul Marotta/Getty ImagesFacebook CEO Mark Zuckerberg.
  • Facebook will announce earnings Wednesday afternoon, and analysts are expecting another standout report.
  • Concerns over fake news and social-media addiction have not seemed to affect the company’s results or stock, both of which keep soaring.
  • But investors and analysts are increasingly worried that those issues could turn off users and, in turn, advertisers.

Much of the news around Facebook of late has been negative.

The company has been pilloried by public officials and others for spreading false stories and for allowing Russian-linked groups to use its site to propagate propaganda. A growing chorus of tech executives and investors, including several former Facebook executives, have expressed growing concern that the company’s service encourages addiction and depression, particularly among kids.

Facebook’s attempts to deal with such problems have been met with scepticism or even harsh criticism.

At the same time, the company’s investors have had little to complain about. Despite all the hubbub, Facebook’s financial results have just kept on getting better, pulling its stock ever higher.

“It’s been an unbelievable stock,” said Daniel Morgan, a senior portfolio manager at Synovus Trust. Both Morgan and Synovus own Facebook shares.

On Wednesday, we’ll get a chance to see whether the company can keep it up when Facebook reports its fourth-quarter results after the bell.

Wall Street is expecting a stellar earnings report

For their part, Wall Street analysts are expecting a boffo report. On average, they’re expecting the social-networking company to announce earnings of $US1.95 a share on sales of $US12.55 billion for the holiday period, according to Bloomberg data.

Should the company meet such expectations, its per-share earnings would have grown more than 60% from the year-earlier quarter on a sales jump of more than 45%. In the fourth quarter of 2016, Facebook earned $US3.6 billion, or $US1.21 a share, on $US8.6 billion in sales.

The company’s results “should be very strong,” the Macquarie Capital financial analyst Ben Schachter said in a research report issued Tuesday.

Despite the run-up in Facebook’s stock – its shares are up 43% in the past year – it’s still a relative bargain compared with those of some other tech companies, Morgan said. Facebook is trading at about 36 times its trailing 12 months earnings. By contrast, Amazon is trading at some 366 times its trailing 12 months earnings.

Still, both investors and analysts are worried that Facebook can’t defy gravity – or negative sentiments – forever.

Investors and analysts have growing concerns about Facebook’s business

There’s growing concern among them that both the fake-news problem and the worries over social-media addiction are ultimately going to weigh on Facebook’s business.

To address those worries, Facebook CEO Mark Zuckerberg announced earlier this month that the company would be downplaying news stories and other posts from organisations and groups that users follow and begin playing up posts from their friends and family members in their News Feed. He warned that as a result of such changes, users would interact less often with Facebook and spend less time on the site.

Everything’s hunky dory right now, but the whole thing could hit the fan if we go into a recession.

That may be happening even before the company has fully rolled out its changes. A recent survey in a research note by Baird Equity Research found that about half of all users across all age groups reported that they used Facebook less often to connect with friends and family members. The reported decline was particular pronounced among those ages 18 to 34. Only about 10% of all users reported using the service more often to connect with friends and family.

Facebook’s revenue is almost entirely driven by advertising. If users spend less time with its service, advertisers could cut back on how much they’re spending with Facebook.

Worries about such trends led Scott Rothbort, the president of LakeView Asset Management, to sell off about two-thirds of the shares of Facebook his firm holds. The site’s News Feeds just seem to be overrun with fake-news stories and political posts that seem guaranteed to turn off a good portion of users, Rothbort said.

The concern is that Facebook users are going to say, “‘I just don’t want this anymore – I don’t need it,'” Rothbort said. “I think that’s where Facebook is vulnerable.”

Advertising is the first thing that gets cut in a downturn

Morgan has a broader concern. The economic expansion is getting long in the tooth, which means a downturn could be around the corner. When a recession comes, it could be particularly troublesome for companies such as Facebook and Google that are so reliant on advertising, he said. That’s because when the economy goes into recession, advertising budgets are among the first things that companies cut back on.

“Everything’s hunky dory right now, but the whole thing could hit the fan if we go into a recession,” Morgan said. “Facebook is going to be the first to get punched in the face, along with Google.”

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