Five Metrics That Will Impact Facebook’s Q4 Earnings

Facebook (NASDAQ:FB) is scheduled to report its fourth quarter and full year results on Wednesday, January 27. The company’s stock has largely mirrored the S&P 500 in 2016 and is down close to 7% year-to-date, but its continued premium valuation (trailing P/E of 98 and price-to-sales ratio of 16.7) reaffirms the market’s high expectations for the company. In its fourth quarter results, we expect the company to report revenue growth of around 40% year-over-year (y-o-y) and meet consensus estimates of $5.36 billion, driven by advertising revenue growth. ^[1]

Advertising revenue growth is likely to be driven by an increase in average price per ad and higher user engagement. Facebook reported an increase of 14% y-o-y in monthly active users (MAU) to 1.55 billion last quarter, and we expect the company to report similar growth rates in Q4 as well. Other important metrics to watch out for on Wednesday will be mobile advertising revenue and revenue growth for Instagram.

See our complete analysis for Facebook

Things To Watch Out For In Facebook’s Q4 Earnings:

1. Average Price Per Ad and Number of Ads Delivered

We think Facebook could report strong growth in advertising revenues during Q4 despite the adverse impact of currency translation. This will likely be driven by considerable increases in ad pricing, coupled with a decrease in the overall number of ad engagements. These price-volume dynamics will result from an increase in the number of marketers actively advertising on Facebook, an increase in frequency of ads in News Feed, and increased usage on the mobile platform (where fewer ads are shown). We expect ad pricing to be the key driving factor for ad revenue growth in the future, owing to improvement in the quality, relevance, targetability, and measurement of ads. In the first nine months of 2015, the average price per ad increased by 184% y-o-y and the number of ads delivered declined by 49%.

2. Mobile Usage and Monthly Active Users

We expect mobile advertising revenues on Facebook to see sharp growth in the coming quarters on account of secular trends towards mobile advertising and rising usage of the mobile platform. Mobile monthly active users (1.39 billion) grew by 23% y-o-y last quarter and represented almost 90% of total monthly active users on Facebook (1.55 billion) in September 2015. This is likely to have increased further by the end of December 2015. In contrast, we expect the PC-advertising business to decline in the near-term.

3. Growth In User Base

The sequential growth rate in Facebook’s monthly active user base rose to 4% in Q3 2015, up from 3.6% in the prior quarter. We expect the company to report healthy growth in user base during the fourth quarter as well. Additionally, it will be interesting to get an update on the current user bases of Messenger and WhatsApp — which were seen at 700 and 900 million, respectively, at the end of last quarter.

4. Video Ads And Instagram

Facebook seems to be increasingly focusing on videos to raise its growth outlook — the number of video views per day surpassed 8 billion in September 2015, as compared to one billion in September 2014. While the recent launch of live video to the Mentions app for public figures, and interactive 360 videos in News Feed, could contribute to a large increase in this metric in Q4, we are also interested to learn more about the impact on monetization. Additionally, Instagram’s revenue is expected to rise significantly in the near future, and we will be looking for details related to advertising trends on the photo-sharing platform during the earnings call. Instagram’s user base crossed 400 million by the end of September last year.

5. Oculus, Messenger, Whatsapp

While Facebook’s other platforms, such as Messenger, Whatsapp and Oculus, have contributed marginally to the overall revenue stream in the past, we expect them to become large sources of value in the coming years. Accordingly, we are keen to hear some management commentary on how it plans to ramp up monetization on these businesses in the short term, along with their future outlook.

Our $109 price estimate for Facebook’s stock represents around a 15% premium to the current market price.

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1. Reuters Analyst Estimates, January 2016 [↩]