Facebook Inc (NASDAQ:FB) is set to release its next earnings report on Nov. 2, and analysts generally expect some upside to estimates. The social network is beginning to battle a negative shift in investor sentiment due to management’s comments about ad load and the more difficult comparison that is coming up in the fourth quarter.

Facebook Inc (FB) Needs A "Second Act," Will Oculus Fit The Bill?

No concerns about Facebook’s ad load

Deutsche Bank analyst Ross Sandler said he’s not actually worried about falling ad load because his third quarter checks have been upbeat and don’t indicate a ceiling any time soon. He added that the social network’s multiple has compressed in a fashion similar to what Alphabet’s multiple did when the company was at a similar age. However, unlike the Google parent, Facebook Inc (NASDAQ:FB)’s revenue hasn’t decelerated yet. As a result, he believes it creates a setup for “a nice trade into 2017.”

He added that a bigger increase in Facebook Inc (NASDAQ:FB) stock might not happen until what he calls a “second act” appears.

Room for upside to the third quarter

His ad checks for the third quarter are mostly positive, but he warns that the “typical ‘needs to beat consensus by $250m’ trend” might be a little tougher to achieve based on seasonality. Despite this, he still sees room for “modest” upside to his ad revenue estimate, which stands at $6.8 billion. His checks suggest that SME advertisers now make up more than half of the social network’s ad revenue and that their number is growing more quickly than those in any other segment. He believes this is a good omen for sustainable ad growth.

His checks also suggest that Facebook Inc (NASDAQ:FB) is still optimizing in the areas of Bid, Placement, Audience, Creative and Ad Type and also taking more control over the budgets of bigger clients.

Facebook needs a “second act”

The Deutsche Bank analyst expects the social network’s core ad business to see growth across devices and believes that the Street’s estimates are already including the core Facebook Inc (NASDAQ:FB) ad business and also Instagram. However, he thinks consensus doesn’t include opportunities from Messenger or WhatsApp, which he believes will add $10 billion in incremental revenue after they are fully ramped, although he thinks this may not happen until at least 2018.

He adds that the social network differs from Amazon but is similar to Alphabet in that it hasn’t yet established a “second act,” or a second major business apart from its core ad business. He suggests that virtual reality or artificial intelligence may end up fitting into that role.

Could Oculus be that second act?

The company’s virtual reality headset, Oculus, was the center of attention last week at the annual Oculus Connect 3 developer conference. Morgan Stanley analyst Brian Nowak attended the conference and offered some highlights in a report dated October 10.

Facebook Inc (NASDAQ:FB) unveiled the Oculus Touch motion controllers, which will become available on December 6 for $199. Buyers can add another sensor for $79, which will enable 3D mapping so users can move around the space. They can also add in-ear Rift headphones for $49. Nowak sees the controllers as increasing immersion and greatly expanding the use case for virtual reality.

He also believes developers’ familiarity with touch controls may draw them into Oculus if they haven’t already made apps for it. Further, he thinks the controllers might drive gamer adoption because gamers are also familiar with such controllers. Facebook Inc (NASDAQ:FB) also unveiled 35 new Touch-compatible games which will also be available just in time for the holidays.

The Morgan Stanley analyst also reports that Oculus is making strides in bringing down the cost of the VR headset as the Oculus Rift is still priced at more than $1,200 when including the headset, Touch controllers and the high-power computer that’s needed to make it all work. He sees this as an important barrier in order to drive adoption, but Facebook Inc (NASDAQ:FB) unveiled $499 PCs that are compatible with the VR headset. The company is also developing a new standalone headset that will be priced between $99 and $599.

Further, Facebook Inc (NASDAQ:FB) is looking to expand VR use beyond gaming and into social, education, and professional training. Avatars, Virtual Parties and Rooms all fit into the social category, while developers focused on education

Facebook Inc (NASDAQ:FB) shares slipped 1.04% to close at $128.88 on Tuesday.