Analysts Anticipate Strong 3Q16 Results for Facebook (FB)

By Carrie Williams

Facebook logoFacebook’s (NASDAQ: FB) earnings are expected to be announced tomorrow Nov 2. Facebook showed quite a nice performance lately, closing on to its 52-week high of $133.50 despite the burgeoning Snapchat threat and a general slump in the US market. Facebook Inc. The analysts at Cantor Fitzgerald issued a report just yesterday, saying that there is still a lot of steam left for the popular social networking giant and expect the company to report strong 3Q16 results tomorrow, after the market close. Analyst Youssef Squali reiterated his Buy rating for the company while raising the price target to $160. This price target is an upside of 22.15% from the current price of $130.90.

The analyst firm believes that Facebook has quite a few positive drivers like its unequaled targeting potential, very potent monetization formats against the secular tailwinds propelling digital advertising, as well as its humongous popularity as the largest and most engaging mass-reach Internet platform for advertisers. In fact, Facebook’s ad revenue growth is nearly three times the rate of the overall online ad market. In addition, other brands within Facebook, like Messenger, WhatsApp, and Oculus have also tasted success and are expected to provide upside optionality to the stock in the longer term.

Youssef Squali estimates $6865.0M (+52.5% YoY) as the 3Q16 revenue and $4024.2M (58.6% margin) as the EBITDA estimates for FB. This is slightly less than the Factset survey estimates ($6,908.5M and $4,225.8M, respectively) as the analysts feel that the slight deceleration in ad revenue, users and engagement has a potential to drive the revenue a little lower. However, a positive read-through from Alphabet’s earnings last week points to a potential 3Q16 beat as well.

The intra-quarter channel checks done by the firm indicated a good demand for Social inventory across both brands as well as direct responses. According to Merkle, the growth in ad spend on Facebook is estimated to be +63% YoY in 3Q16, while Kenshoo pegs it at +45%. Meanwhile, there was a 249% average increase in the quarterly ad budget in Nanigans’ 20 highest-spending e-commerce and game advertisers (DR). This is 26% YoY jump in return on ad spend (ROAS).

A significant surge in revenue is expected from the mobile ad, contributing to more than 80% of the total ad revenue. A 72.8% YoY growth is expected in this arena, translating to revenue of $5793 million. With desktops fast becoming obsolete thanks to the on-the-move generation, its ad revenue is also expected to decline by 6.4% YoY, resulting in only $886 million as the revenue. The payments, as well as miscellaneous fees, are also expected to decrease due to the overall decline in PC gaming.

Investors are also awaiting the latest updates on the misstated video metrics, Oculus acquisition, and Monetization efforts for Instagram and WhatsApp. Oculus had recently acquired InfiniLED that specializes in low power LEDs. The testing works are currently in progress for Facebook’s latest in-app camera features, which bear a close resemblance to the Snapchat full-screen camera view. In addition, talks are also on for creating an under the sea cable between LA and Hong Kong to increase bandwidths. Facebook had recently added features like recommendations, food ordering, ticketing, local business quotes etc. to its pages, aimed at enhanced social recommendation and event discovery.

According to the 26 analysts polled in the past three months by TipRanks.com, FB has an overall consensus rating of a Strong Buy and an average price target of $162.13. This represents a 23.77% upside from the current levels.