Facebook Earnings Preview: Ad Revenues Set To Grow

Facebook (NASDAQ:FB) is scheduled to report its third quarter results on Wednesday, November 1. We expect the company to report revenue growth of around 40% year-over-year (y-o-y) and meet consensus estimates of $9.84 billion, driven by advertising revenue growth. Advertising revenue growth is likely to be driven by an increase in average price per ad and higher user engagement.

Facebook’s monthly active user (MAU) base has grown to over 2 billion. While this is encouraging, as Facebook and its platforms (Whatsapp, Instagram) now have close to 60% penetration among internet users, average revenue per user for the company could decline as new users were mostly added from international markets, which have lower monetization rates. Other important metrics to watch out for on Wednesday will be growth in mobile usage and Instagram’s revenue growth, as mobile advertising contributes over 85% of Facebook’s advertising revenues. Recently, the company rolled out paywall services for content in order to entice more content developers to use Facebook as a platform to disseminate information. The company is also looking to improve its engagement and monetization rate by increasing the video content across its platform. We expect management to share more insights on how this strategy has fared among users and advertisers.

Key Metrics In Focus

• Advertising Revenue Set To Grow: Facebook reported 47% growth in revenue to about $17.4 billion in the first half of 2017 over the same period last year, driven by solid growth in advertising and mobile ad revenues across geographies. Mobile ads now account for 87% of advertising revenues and stood at $8 billion in Q2. Mobile ad revenues grew because of increases in both the frequency of ads shown in News Feed and the price per ad. This trend is expected to persist in Q3 and drive revenues.

• ARPU To Grow: The average revenue per user (ARPU) across Facebook’s platform has improved considerably in the first half of 2017. Worldwide ARPU has improved by 23% from $3.82 in Q2 2016 to over $4.70 in 2017. Marked improvement in ARPU from the U.S. and Canada has been the primary driver of the improvement. The ARPU for the U.S. and Canada improved by 35% in Q2 2017 to around $19.40. However, 88% of Facebook’s MAUs are outside of North America, but they contribute less than 50% of the company’s total revenues. If we exclude the relatively mature European market, 69% of Facebook’s users in Asia-Pacific and rest of the world contribute just 25% of the company’s revenues. This presents a huge opportunity for growth for the social media giant. We believe that Facebook has added more users from international markets due to expanded internet connectivity and smartphone usage. As digital marketing continues to gain in popularity over traditional advertising channels in these regions, the company’s ARPU should increase over the long run.

Our $165 price estimate for Facebook is slightly below the current market price.

Please refer to our complete analysis for Facebook here.

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