Facebook Earnings Preview: While Top-Line Will Be Driven By Mobile Monetization, Profitability Could Face Some Pressure

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All eyes will be on Facebook (NASDAQ:FB) on Wednesday, April 22nd, when the company reports its first quarter results for 2015. We expect the company’s top-line growth was driven by factors including an increase in mobile monetization, a rise in the number of marketers, as well as an improvement in ad products. Moreover, the continued rollout of video ads likely further bolstered monetization during the quarter. However, the company’s bottom-line could have faced some pressure during the first quarter owing to planned increase in expenses.

We presently estimate Facebook’s stock price at $87.52, as we expect monetization on core platform to increase to over $40 billion in the long-run. In addition, while Facebook hasn’t begun monetizing its non-core platforms including WhatsApp, Instagram, Messenger, etc., we believe these businesses could become huge for the company over the next five years.

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See our complete analysis for Facebook

Increased Expenses Could Weigh On Margins

Facebook is expected to step up its investments during 2015 — in GAAP terms, expenses could rise by 55% to 70% during the year, and in non-GAAP terms, it could increase by 50% to 65% annually. This planned increase in expenses could weigh on the margins during the first quarter of 2015. Though this may seem troubling, we think the company is moving in the right direction by accelerating its spending as there is tremendous opportunity ahead not only on the core FB platform, but also on other platforms including WhatsApp, Instagram, Messenger, Search, etc. We think these non-core platforms could become multi-billion dollar businesses in the long-run, and could help fuel top-line growth over the coming years.

Ad Revenue Growth Will Be Driven By Increase In Ad Pricing And Mobile Advertising

Facebook’s ad revenue rose by 65% during 2014; this was mainly driven by 173% increase in average ad pricing, as the number of ad impressions came down by 40%. An increased proportion of news-feed ads (which are fewer but more prominent), and a shift towards mobile usage, resulted in these price/volume dynamics. We expect that the same trend persisted during the first quarter as well. However, since feed-based ads were rolled out on a large scale during Q1 2014, it could impact year-over-year comparisons in the quarterly results.

In addition to ad pricing, we expect that a rapid increase in mobile monetization propelled Facebook’s earnings during the first quarter. Mobile advertising revenue almost doubled during Q4 2014, to account for 69% of the overall ad revenues. Moreover, mobile monthly active users (MAUs) stood at 1.19 billion at the end of 2014, comprising over 85% of the overall monthly active user base. With the mobile platform being highly under-penetrated within average brand advertising budgets presently, we expect Facebook’s mobile monetization to rise rapidly over our forecast period. This will further be driven by factors such as better and more targeted ads, a rise in the number of marketers,  an increase in international average revenue per user (ARPU), and improvement in ad measurement tools.

Information Pertaining To Video Advertising And Monetization On Non-Core Platforms Will Be Keenly Tracked

Online video advertising is an area that is quickly gaining traction on Facebook. The number of video views per day recently surged to three billion, as compared to one billion in September last year. Since Facebook rolled out auto-play video ads internationally in Q4, and also recently began scaling up video ads on Instagram platform, we will be keen to track the progress against these initiatives. We believe expansion in video ads will bolster ad pricing in the future.

We will also be tracking the earnings call to know more about the future monetization strategy on non-core platforms including Messenger, WhatsApp and Instagram. With Facebook recently integrating payment feature and third-party apps on Messenger, we’d be interested to know more about its impact on financials during the conference call.

Our $87.5 price estimate for FB’s stock, represents around 10% upside to the current market price.

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