Facebook needs to beat expectations on Wednesday or it may face a near-term day of reckoning, as its sky-high valuation has investors demanding a scale of growth not expected in any of its major rivals.
"This is the highest-bar stock of the internet space," said RBC Capital Markets analyst Mark Mahaney. "An in-line quarter will not cut it for Facebook, the stock, as a trade."
Mahaney expects Facebook to report quarterly revenue of $5.43 billion and non-GAAP earnings per share of 68 cents. That is just above Wall Street consensus, at $5.25 billion and 62 cents respectively, according to Thomson Reuters.
Last quarter, Facebook smashed expectations, posting revenue that was 9 percent higher than the Street expected, and earnings per share 11 cents above consensus estimates. On the heels of such strong results, if Facebook doesn't deliver another very strong quarter, the stock may trade flat or down a percent or 2, which could represent a buying opportunity, said Mahaney.
"The bigger the expectations correction, the bigger the buying opportunity," he said. RBC has a "buy" rating on the stock and a $160 price target.
Of course, there are plenty of caveats. If there appear to be any fundamental shifts in Facebook's value proposition — such as advertisers deciding Facebook is not delivering sustained return on investment, or user engagement dropping off — it could be a sell opportunity, he said.
"The chance that there is a fundamental negative inflection point for demand for Facebook from either consumers or advertisers — I think that is very low — less than 10 percent," said Mahaney, "But you know, anything is possible."
On average, analysts expect the company to report revenue growth of 48 percent over last year. That puts Facebook in the hyper-growth category, and is one reason it is largely seen as a must-own stock for investors long term. By comparison, Alphabet delivered 23 percent growth when it reported results on Thursday, and the average S&P 500 stocks are growing revenue at about 4 to 5 percent annually.
RBC has Facebook trading at 24 times next year's earnings and expects the company to grow earnings by 40 percent over the next three years. By comparison, the firm has Google trading at 19 times next year's earnings, and expects it to grow earnings by 15 to 20 percent over the next three years. In other words, Facebook has twice the growth outlook as a Google and trades at about a third higher the multiple, said Mahaney.
"Relative to growth, Facebook is actually more attractive than Google," he said.
Both companies will benefit as advertisers shift more TV ad dollars to digital.
"In the short-term, we expect Facebook and Google will continue consolidating the lion's share of advertising dollars coming online with their substantial scale advantages relative to the next closest digital ad platforms," Stifel Nicolaus analyst Scott Devitt said in a note to investors Friday. Stifel has a "buy" rating on the stock and a $130 price target.
Facebook is likely to report a slight dip in ad revenue growth this quarter, following a similar seasonal shift as last year, analysts said.
"This was seen in Google's results," MKM Partners analyst Rob Sanderson said in a report Monday. "We think expectations are are appropriate, with consensus ad revenue growth decelerating to 50 percent from 57 percent last quarter."
Mobile ad revenue will likely contribute well over 80 percent of Facebook's revenue this quarter, Cantor Fitzgerald analyst Youssef Squali said in a report to investors Monday. Cantor has a "buy" rating on the stock and a $140 price target.
"Google highlighted mobile as the number one driver of revenue growth in its first quarter results, which bodes well for Facebook," said Squali.
As the number of mobile devices proliferate, Facebook usage and mobile ad revenue will also grow. "We think mobile will gain share of marketing budgets against every other advertising medium for most of our lifetime," said Sanderson.
Instagram and video ads are expected to begin to contribute meaningfully to Facebook's revenues starting this year. Facebook Live and its messaging platforms — Messenger and WhatsApp — are likely to deliver returns within three to five years, and investments in augmented reality and virtual reality will likely begin to pay off over the longer term, said Devitt.
Oculus Rift VR platform has significant potential to change the way Facebook users communicate, and applications for education, gaming and services are likely in the future, Wedbush analyst Michael Pachter said in his earnings preview note last week. Pachter has a "buy" rating and a $128 price target.
"Competition has been slow to materialize and we believe that Facebook's network effect and large user base all but ensure that it remains the dominant social media platform for the next decade and beyond," he said.