Facebook (FB) Q3 Earnings: Will Ad Revenues Do The Trick?

Facebook, Inc. (NASDAQ:FB) is set to report third-quarter 2016 results on Nov 2. The company reported a positive earnings surprise of 22.58% in the last quarter. It has also delivered an average positive earnings surprise of 18.25% over the trailing four quarters. Let’s see how things are shaping up for this announcement.

Factors to Consider

Online and mobile advertising revenues will continue to be in focus in the upcoming quarterly earnings release. Facebook’s mobile ad business has become the mainstay of its advertising revenues. Mobile monetization has increased with a higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads. Notably, in the second quarter, mobile ad revenues grew 81% to $5.2 billion representing 84% of total ad revenues. Facebook has over 3 million active advertisers and over 60 million active small and medium size businesses (SMBs) of which 85% are active on mobile. However, Facebook needs to tread cautiously so as not to irritate users with too many ads.

Facebook has just started to monetize Instagram. Since it opened Instagram’s ad platform to worldwide advertisers last year, it has emerged as an important cash cow for Facebook. Again there were no exact numbers for the last reported quarter with regard to contribution from Instagram but Facebook said that the platform has now over 200,000 advertisers. Investors will once again be focused on Instagram’s money minting abilities to boost overall ad revenues for the company. After Instagram, investors will be looking at the company’s detailed monetization efforts for Messenger & WhatsApp (both 1 billion plus users platform).

Moreover, Facebook has been aggressively promoting “Live” in order to capture the opportunity presented by ever increasing video viewing on social media platforms. Also, it has forayed into enterprise software by launching Workplace. With Workplace, the social media giant is trying to break into the lucrative enterprise software market. Per a Jun 2016 Gartner report, global spending for enterprise software will grow 7% year over year to $367.5 billion in 2016. This is a lucrative opportunity for Facebook, given the higher margins involved. Facebook also upped its ante in the social commerce area with the launch of Marketplace.

Facebook’s gargantuan user base of 1.7 billion enables it to fend off any competition. However, with the user base already at sky high levels, a relative slowdown is imminent. Also, it is approaching full penetration in North American and European markets. However, growth in Asia and rest of the world should help cushion user growth in the foreseeable future.

Facebook was never intended to be just a social media service. However, this year, Facebook has more than ever clearly highlighted its ambitions of becoming a tech powerhouse. We continue to be impressed with Facebook’s efforts to develop cutting edge AI & AR/VR technology. It also acquired Nascent Objects to boost its hardware efforts.

However, despite all these growth catalysts, Facebook faces a number of challenges. At its last earning conference call, Facebook warned that revenue growth rates will now start to face tougher comparison. Ad load, which so far has been a leading factor driving revenue growth, will now start to “grow modestly” in the coming quarters and won’t be a big factor after mid-2017. Costs will continue to rise as the company ramps investments. Also, migration of teenagers to other popular social networks is also concerning.

FACEBOOK INC-A Price and EPS Surprise

FACEBOOK INC-A Price and EPS Surprise | FACEBOOK INC-A Quote

Earnings Whispers

Our proven model does not conclusively show that Facebook is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Facebook has an Earnings ESP of 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 76 cents.Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Zacks Rank: Facebook has a Zacks Rank #4 (Sell). Please note that we caution against stocks with a Zacks Rank #4 and 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some stocks that, as per our model, have the right combination of elements to post an earnings beat this quarter:

Stratasys Ltd (NASDAQ:SSYS) with an Earnings ESP of +41.67% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Inovalon Holdings, Inc. (NASDAQ:INOV) with an Earnings ESP of +50.00% and a Zacks Rank #2

Imperva Inc. (NYSE:IMPV) with an Earnings ESP of +20.64% and a Zacks Rank #3

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