Facebook Q4 Earnings Preview: How Important is Instagram to Bottom Line?

Facebook may be forced to highlight Instagram’s performance sooner rather than later

As Facebook prepares to share its Q4 earnings on Wednesday, it feels as though 2018 never happened.

That was the year the Cambridge Analytica data leak came to light, when 87 million users had their profile information unknowingly accessed by the political data firm. Facebook executives, including CEO Mark Zuckerberg, made countless mia culpas in the aftermath, promising to take user privacy more seriously. But the damage was only exacerbated by a string of embarrassing data breaches as the year came to a close. Facebook’s stock price took a major hit, dropping 25% on the year, closing 2019 at about $133 per share.

At the time, the social network looked both vulnerable and outdated to legions of potential users, especially Millennials and Gen Z’ers.

That didn’t turn out to be the case.

Instead, Facebook rebounded in a big way last year, with its share price climbing more than 50% in 2019. Rather than abandon the platform, users stuck around — and more joined the fold, with Facebook entering the fourth quarter with 1.62 billion daily active users. Facebook’s users, it appeared, didn’t seem to care that much about its security or regulatory issues, even after Facebook paid $5 billion to the FTC to settle its data breaches. And with its users not jumping ship, advertisers had little reason to turn its back on Facebook, which pulled in $50 billion during the first 9 months of 2019, putting it only $5 billion shy of surpassing its total from the previous year.

Investors have responded the same way, shrugging off any lingering fears and pushing the company’s stock toward its all-time high of about $220 per share in the first weeks of 2020. That’s where Facebook finds itself on Wednesday. Wall Street will be looking to see if the company closed its bounce-back 2019 strongly when it shares its Q4 results this afternoon. Here’s what analysts will have their eyes on:

How Much Is Instagram Helping?

For years, analysts have expected Facebook to shine a light on Instagram’s monetization efforts, likely during an earnings call after the company posted underwhelming quarterly results. That hasn’t been the case, yet, with Facebook still growing its user base and ad revenue at an impressive clip in the last year.

But anyone that’s used Instagram lately knows it has beefed up its advertising efforts, fitting in more ads between Stories and Posts. Those ad dollars are funneling back into Facebook’s overall ad revenue, and the parent company may be forced to highlight Instagram’s performance sooner rather than later.

Morgan Stanley analyst Brian Nowak, in a note to clients, pointed to Instagram as one reason he’s bullish about Facebook this year. Nowak said he expects Instagram Stories to be a “material driver of growth” in 2020, as “engagement remains strong” and ad dollars continue to migrate to digital.

“As such, we see Instagram Stories revenue growing [approximately] 150% in [2020],” Nowak said, adding about $1.7 billion in year-over-year sales in the process. Overall, the firm expects 10% of Facebook’s ad revenue growth to come from Instagram.

With Instagram ads becoming more conspicuous, keep an eye on whether Zuckerberg or another Facebook exec talks about how its popular pictures-and-messaging app has contributed to its top line.

Where are Users Coming From? 

Facebook’s stock, like most social media companies, rises and falls in large part based on its user growth. As mentioned earlier, the company has been teflon to unflattering headlines in recent years, but it’s running into a small problem at home: It’s getting harder to find someone who doesn’t use Facebook on a daily or monthly basis in the U.S. or Canada — leaving little room for domestic growth. This remains Facebook’s strongest market in terms of generating revenue per user, but it”ll need to find customers in Asia, Latin America and Africa to continue growing at a substantial rate.

Facebook’s daily user growth by quarter

Stifel analyst John Egbert, in a note to clients this week, projected Facebook’s daily and monthly user count will both grow approximately 8% year-over-year, to 1.65 billion and 2.5 billion, respectively.

Time Spent on Facebook

The other side to the coin for Facebook when it comes to users is how much time they’re spending on the platform.

The landscape for Facebook is different than a decade ago: It’s now competing against several streaming services, as well as growing competitors like TikTok, for how much attention they command. The longer it keeps users glued to its service, the more ads it can hit them with. And to keep viewers engaged, Facebook has debuted several new features in recent years. The results have been mixed.

Facebook Watch, its content hub, has produced shows with big-name celebrities like Tom Brady and Will Smith since launching two years ago, but it has largely failed to resonate with viewers. Last June, Facebook said 140 million users — or less than 10% of its daily users — watched at least 1 minute of its shows each day. It’ll be worth keeping an eye on whether Facebook  has been able to attract more daily viewers during its Q4 report.

Other features could prove more impactful. This time last year, Facebook reported 500 million people used its Stories feature on a daily basis — and analysts anticipate that figure has dramatically increased.

“We estimate the company reached 1.5B MAUs during [the fourth quarter], which is a milestone we think would be well received by the Street, particularly amid increased competition for younger users from Snap and TikTok,” Egbert said in his note.

Not only would Wall Street welcome this, but advertisers would, too. Facebook users have started to use the service less, according to some metrics; Earlier this month, Similar Web said Android users in the U.S. were using Facebook 52 minutes per day — down from the 58 minutes users were spending on it each day in April 2018. If Stories continues to grab new users, that figure should get a healthy boost.

Sean Burch

Sean Burch

Tech reporter • sean.burch@thewrap.com • @seanb44 



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