Facebook Inc (FB) Earnings Preview: Instagram In Focus

Facebook Inc (FB) Earnings Preview: Instagram In Focus

Facebook is set to release its third quarter earnings report in just a few hours, and investors appear to be expecting a positive print. Shares of the social network climbed by as much as 1.39% to $104.01 per share during regular trading hours today.

Facebook’s (FB) results expected to be positive

Recent data points have indicated that engagement trends on Facebook Inc (NASDAQ:FB) are positive, so analysts are generally expecting solid results tonight. Consensus estimates suggest that the social network will post total revenue of $4.37 billion, representing a 36% year over year growth rate. Analysts are looking for non-GAAP earnings of 52 cents per share, which would be a 20% increase from last year, and GAAP earnings of 26 cents per share, which would represent a 13% decline.

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Wall Street is expecting desktop ad revenue to fall 7% year over year to $930 million and mobile ad revenue to increase 66% to $3.25 billion. They expect payments and other revenue to fall 17% to $205 million. Analysts want to see average revenue per user of $2.90, an increase of 71 cents, and 1.5 billion monthly active users, which would represent a 13% year over year increase.

Expectations running high

MKM Partners Managing Director Rob Sanderson has a Buy rating and $120 per share price target on Facebook. He thinks whether or not the social network will post upside to consensus estimates will once again depend on ad pricing. However, he thinks it’s possible that the ad load on Instagram will end up mattering more than overall add pricing.

He wants to know more about just how quickly Facebook Inc (NASDAQ:FB) is ramping advertising on Instagram, as he has seen conflicting anecdotal reports on how many ads are being shown. He said it looks like there’s a “noticeable increase” in ad loads for some users while others have little to no increase in their feeds. The analyst noted that Facebook Inc (NASDAQ:FB) management has emphasized that they intend to ramp advertising in Instagram slowly.

Sanderson noted that Facebook Inc (NASDAQ:FB) remains a consensus long and that short interest is still low at about 36 million shares, although it has risen 30% quarter over quarter.

Facebook Inc (FB) stock around earnings

Further, he pointed out that Facebook Inc (NASDAQ:FB) shares have climbed 6% since the company’s last earnings report compared to the NASDAQ’s flat performance. The stock rebounded sharply starting in the second half of August.

Sanderson also noted that Facebook shares have calmed down around the company’s earnings report, with an average move of 3.1% after the print over the last six quarters. In the first seven quarters after the initial public offering, shares moved by an average of 11.9% following the earnings report.

He believes that buy-side expectations might be “somewhat inflated” and expects Facebook shares to fall if the results are in line with expectations. On the other hand though, he said the early ramp at Instagram doesn’t indicate anything about Facebook’s full monetization potential and thus is “unimportant to the bigger picture.”

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