Facebook Q2 2018 earnings preview: Instagram booming, GDPR dismissed

Facebook co-founder, Chairman and CEO Mark ZuckerbergPhoto by Chip Somodevilla/Getty Images

• Analysts are salivating over Facebook ahead of its Q2 2018 financial results due to be released on Wednesday.
• There are two key reasons.
• First, despite all the headlines, Facebook’s chain of scandals isn’t expected to hurt its bottom line.
• And then there’s Instagram. The Facebook-owned photo-sharing app is red hot right now — and it’s still growing rapidly.

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Facebook is facing one of the biggest crises in its 14 year history. 

But don’t expect to hear much about that on Wednesday, when the social networking giant reports its Q2 financial results.

Wall Street analysts are shrugging off the series of scandals plaguing the company — from the Cambridge Analytica user data leaks to CEO Mark Zuckerberg’s controversial remarks on Holocaust denial — and predicting a bumper three months for the social network.

Advertising, the main money-maker on the 2-billion member social network, is expected to remain strong. 

But Facebook’s real “ace in the hole” is photo-sharing app Instagram, which has enjoyed a very different narrative in 2018. Largely insulated from Facebook’s PR troubles, Instagram has rolled out major new features, experienced soaring ad revenues, and hit the major milestone of one billion users.

A ‘pivotal barometer’

A lot is riding on Facebook’s Q2 results. It will provide clarity as to whether there is any longterm fallout from the Cambridge Analytica scandal, and whether GDPR, Europe’s tough new privacy rules, have had an impact on the business. 

As market research firm GBH puts it, it is a “‘pivotal barometer’ … to gauge any fundamental damage.”

Its verdict? It’s looking rosy: “We believe 2Q tracked to be a relatively strong quarter with modest upside to the Street’s estimates … In a nutshell, overall this should be another step in the right direction for Facebook after a few months of navigating these unprecedented data concerns.”

Meanwhile, in a research note published Monday, Goldman Sachs analysts wrote that “our checks point to a strong quarter. Ad partners continue to see strength in Facebook and Instagram spending. Multiple partners cited the strength in Instagram user growth as a key driver for incremental inventory.”

The investment bank is predicting revenue of $13.4 billion for Q2 2018 (up 44% year-on-year), and GAAP EPS of $1.76. 

Deutsche Bank echoes this sentiment: “Our conversations in the ad industry point to ongoing strength at core Facebook in spite of GDPR / Cambridge Analytica headlines and torrid growth at Instagram,” wrote Deutsche Bank analysts.

Google, the other dominant player in the online ad industry, delivered better-than-expected Q2 results on Monday. The company had little to say about the effect of GDPR on its business, and investors cheerfully bid up the stock, ignoring the $5 billion fine levied against Google by European regulators.

And analysts at SunTrust Robinson Humphrey shrugged off the risks from GDPR for Facebook — albeit with a word of caution. “Our checks suggest that GDPR has had virtually no impact on the business so far,” they wrote, “but that [European Commission] regulators remain unsatisfied with FB and peers’ compliance still.”

Instagram is a massive (and fast-growing) cash cow for Facebook

Instagram, which Facebook acquired for $1 billion back in 2012, is proving to be a veritable cash cow for the company.

A recent report by Merkle, an industry research group, laid out just how important it is becoming to Facebook’s core business — in Q2 2018, it estimates that the median advertiser spent a quarter of what they spent on the main Facebook site on Instagram — up from 9% in the previous three months.

Meanwhile, the amount advertisers spent more than doubled year-on-year, and advertising impressions tripled.

Facebook will release its Q2 2018 financial results on Wednesday, July 25, after markets close at 4 p.m. ET / 1 p.m. PT. Business Insider will be covering the news live.