Facebook may make tons of money — but this time, Wall Street's worried about engagement

Key Points
  • In Q4, Facebook saw historic drops in some engagement, including the average number of daily users in North America.
  • Since then, the company has been buffeted by bad publicity over the Cambridge Analytica data leak.
  • If the company reports further engagement drops on Wednesday's earnings report, that could spell bad news for investors.
Facebook down on report about stolen IDs, social security numbers
Facebook down on report about stolen IDs, social security numbers

Mark Zuckerberg has faced his critics online and in Washington, but on Wednesday, Wall Street gets its chance to grill the Facebook CEO.

Usually there's little to complain about for the company that has come to dominate the digital ad industry, making billions in quarterly sales. In that regard, nothing much has changed: The company is expected to post earnings of $1.35 per share in the first quarter on revenue of $11.41 billion — year-over-year increases of 30 percent and 42 percent, respectively, according to Thomson Reuters.

But money may take a back seat to engagement — how many people are logging on each day and how much time they spend on the platform — when Facebook reports its quarterly earnings on Wednesday after the bell.

Mark Zuckerberg
David Ramos | Getty Images

When Facebook last reported in January, the number of daily active users dropped for the first time in North America, falling from 185 million in the third quarter to 184 million in the fourth quarter. On top of that, Facebook's pledge to clamp down on purported "clickbait" reduced the amount of time users spent on its social network by 50 million hours a day in the quarter, or 5 percent.

Since then, Facebook has endured backlash surrounding its failure to ensure that third parties had deleted stores of personal data. Those concerns, around a firm called Cambridge Analytica, built upon previous allegations of Russian agents meddling in the 2016 U.S. presidential election.

"Should recent negative engagement trends in North America and Europe persist, we believe forward engagement estimates could prove optimistic," Stifel analysts wrote on Monday. "Overall, we continue to see heightened risk around regulation, consumer trust, and consumer usage levels of the platform."

Zuckerberg denied any "dramatic falloff" in the number of Facebook users when pressed by regulators earlier this month. Some analysts — such as Daniel Ives, head of technology research at GBH Insights — think the damage of the data leak may already be contained.

But Facebook makes money from advertisements, so getting more eyeballs lingering on the Newsfeed is how it keeps the business booming. Any lapse in engagement could be a bad sign.

WATCH: Facebook's list of content that can get you banned

Here's Facebook's once-secret list of content that can get you banned
Here's Facebook's once-secret list of content that can get you banned