Morgan Stanley & Co analysts Scott Devitt, Jordan Monahan, Erhan Soyer-Osman, and John Egbert look at Facebook and conclude that Instagram could be a key driver for the company, as well as video advertising.

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Facebook Inc (FB) continues to lead

Facebook Inc (NASDAQ:FB) continues to lead the socially enabled internet; we forecast 927m mobile MAUs (+36% Y/Y) and expect mobile to exceed 50% of total ad revenue at $1.1B (+25% Q/Q). We expect continued mobile momentum as both Instagram and video begin to contribute in 4Q.

We expect 4Q2013 revenue and EBITDA to be about in line with to above consensus estimates, which call for growth of 48% Y/Y and 49% Y/Y, respectively. Our estimates call for total revenue to increase 51% Y/Y to $2.39b and for advertising revenue of $2.16b to grow 63% Y/Y. We look for Facebook Inc (NASDAQ:FB) mobile ad revenue to comprise 51% of total advertising revenue.

We expect Instagram to help mobile momentum given advertising launch during the quarter. We estimate Instagram could contribute about $255m in 2014, and nearly $500m in 2015, or around 4% of total ad revenue. A recent global survey from GWI Social indicated that the
biggest rise in active users between 2Q and 4Q among social networks was led by Instagram (+23%). We model Instagram WW DAUs growing at 10% CAGR from 2014-2017, with potential for upside.

Upcoming stock catalysts:

(1) video advertising, which in our view, may be Facebook Inc (NASDAQ:FB)’s next multi-billion dollar opportunity. We see video advertising contributing in 4Q and boosting total revenue by 10%-15% within 1-2 years; (2) more brand advertiser dollars, given a new comScore study that found users were 37% / 50% more likely to visit brand / model pages following a Facebook automotive ad campaign. In our view, increased brand advertising campaigns on Facebook Inc (NASDAQ:FB) may lend itself to faster uptake of Facebook’s video ad products.

Key Questions

(1) Update on user engagement metrics, including teenage usage; (2) Usage of Instagram’s new direct photo product; (3) Ad load across different user products and geographies; (4) Update on user and advertiser demand from video advertising across Facebook Inc (NASDAQ:FB)’s ad products.