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

Mark ZuckerbergPaul Marotta/Getty Images

  • Facebook will announce earnings Wednesday afternoon, and analysts are expecting another standout report.
  • Concerns raised over fake news and social media addiction have yet 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 officials, have expressed growing concern that the company's service encourages addiction and depression, particularly among kids.

Meanwhile, Facebook's attempts to deal with such problems have been met with skepticism or even harsh criticism.

But there's one group associated with the company that's had little to complain about - investors. 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 if 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 $1.95 a share on sales of $12.55 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 $3.6 billion, or $1.21 a share, on $8.6 billion in sales.

The company's results "should be very strong," 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 last 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.

In an effort to address those worries, Facebook CEO Mark Zuckerberg announced earlier this month the company would be downplaying news stories and other posts from organizations and groups users follow in users' news feeds, and begin playing up posts from their friends and family members. 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 they use Facebook less often to connect with friends and family members. The reported decline was particular pronounced among those aged 18 to 34. Meanwhile, only around 10% of all users reported using the service more often to connect with friends and family.

Facebook's revenues are 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, figuring they'll have less chance of getting their messages out to them.

Worries about such trends led Scott Rothbort, president of LakeView Asset Management, to sell off about two-thirds of the shares of Facebook his firm holds. Users' 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, said Rothbort.

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

Advertising is the first thing that gets cut in a downturn

For his part, Morgan has a broader concern. The current 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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