Facebook tops Q3 estimates, operating margin rises to 50%

Despite reporting an exceptional Q3 2017 results that blew away analysts’ estimates, the stock of social media platform provider Facebook, Inc. (NASDAQ: FB) remains weak at $177 levels.

While presenting the results, the CEO Mark Zuckerberg revealed that the operating expenses would increase considerably in 2018 as the company strives to protect its community from fake news and hate speech. That keeps the stock bearish.

However, we expect the bullish sentiment to return soon due to the facts presented below. The stock of Facebook closed Friday’s trading session at $179.

The Menlo Park, California-based company reported Q3 2017 revenues of $10.33 billion, up 47% from $7.01 billion in the similar period last year. The Street Consensus estimate was $9.84 billion for the quarter.

CBS News

Third-quarter profit jumped to $4.71 billion, from $2.63 billion last year. Earnings per share increased 77% to $1.59 per share, from $0.90 per share in the year-ago period, and beat analysts’ estimates of $1.28 per share. Facebook no longer reports earnings on a non-GAAP basis.

Mobile ads accounted for 88% of the total revenues of Facebook, up from 84% in the prior-year quarter. Total advertising revenues jumped 49% to $10.14 billion. The COO Sheryl Sandberg stated that the company now has 6 million advertisers. Facebook’s Instagram service has more than 2 million advertisers.

The company reported Daily Active Users (DAU) of 1.37 billion, an increase of 16% from 1.32 billion in the year-ago period. Similarly, Monthly Active Users (MAU) grew 16% to 2.07 billion and surpassed analysts’ estimates of 2.06 billion.

Following the Russian political ads fiasco, Facebook announced that it has decided to double the number of employees to 20,000, in order to maintain integrity in its platform. In this regard, CFO David Wehner announced that capital expenditures will double next year as the company spends more for security and original content. The operating expenses are anticipated to increase by 45% to 60%. That triggered a sell off in the stock. However, there are several positive developments that may lure investors.

The average cost of an ad increased 35%, while total ad impressions grew 10% from last year. The operating margin, an important measure of profit, surged to 50% of revenue from 44% a year ago. Facebook’s headcount increased 47% to 23,165. Following the impressive results, Baird, Morgan Stanley, and Piper Jaffray have issued an outperform rating to the stock of Facebook, with a price target of $200. Thus, impressive Q3 earnings, measures taken to suppress fake news, and an increase in operating margin turn Facebook bullish.

Technically, the stock is trading near the strong support level of 173. The bullishness is confirmed by the rising MACD indicator. Thus, we expect an uptrend to begin soon.

A call option is an ideal instrument to invest under the current circumstances. Before making an investment in a call option, we wish to make sure that an option expiry date closer to November 28 is available. Further, we would like to enter when the stock trades near $177 in the NASDAQ.

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