Facebook is expected to report another blowout quarter

Wall Street is expecting a blowout quarter from Facebook when it reports earnings after the market closes Wednesday.

Analysts surveyed by Thomson Reuters expect Facebook to report earnings per share of 97 cents on revenue of $6.921 billion.

If Facebook delivers those results, the company will have grown revenue 54 percent over the same period last year, and it will mark the fourth straight quarter in which the social media giant has expanded sales by more than 50 percent year over year. Among the five biggest companies in the world by market capitalization — all tech stocks — none comes close to this level of revenue growth.

The stock closed Monday at $131 per share, up 29 percent over the past year. The S&P 500 index was up just over 2 percent over the period.

Facebook
Source: Facebook

Advertising is of course the big driver of Facebook's revenue and accounts for almost all of its sales. Facebook does not provide earnings guidance, but analysts' checks with marketers show that brands have continued to increase spending on Facebook's ad products.

Alphabet's strong earnings results posted on Thursday — propelled by strong mobile and video ad sales — have strengthened expectations for Facebook.

As big brands get more comfortable with Facebook's ad products, it is drawing a greater share of marketing budgets. Facebook has more than 4 million advertisers and is growing ad revenue at three times the rate of the overall online ad market, Cantor Fitzgerald analyst Youssef Squali wrote in a note to investors on Monday.

"They have a lot of data about their customers and they have been able to offer very accurate targeting around demographics and interests, better than almost anyone else," said Joshua March, CEO of Conversocial, which provides software to help brands communicate with Facebook users. Clients include Google, Alaska Airlines, Hertz and Hyatt.

Kate Spade on Instagram
Source: Instagram

Facebook does not break out Instagram revenue, so investors will be listening for color from executives regarding Instagram's monetization on the earnings conference call.

"There are many levers for Facebook's ad revenue growth. Instagram's one of them," John Blackledge, managing director at Cowen and Company, told CNBC's "Squawk Alley" on Wednesday, noting the powerful user metrics of Instagram's new product, "Stories."

The company has only recently started serving ads to Instagram's 500 million monthly active users, and is ramping up advertising quickly. Instagram revenue will reach $2.2 billion this year, according to a projection from JMP Securities analyst Ronald V. Josey.

Facebook will continue to grow average revenue per user on Instagram, which should equal Facebook's global average within the next two years, Wedbush analyst Michael Pachter wrote in a note to investors on Thursday. The platform will add between $4 billion to $5 billion to revenue growth over that period, according to Pachter's estimate.



American Express bot for Facebook Messenger
Source: American Express
American Express bot for Facebook Messenger

Facebook currently trades around 29 times the next four quarters' earnings, an eye-popping figure, though this is down from 34 times in late January. As such, its current valuation is 15 percent more attractive than at the start of 2016, Nomura analyst Anthony DiClemente wrote in an Oct. 17 note.

"What would happen to dip the stock, if it dips at all, it wouldn't be something Facebook oriented. It might be something macroeconomic," said Paul Meeks CIO and portfolio manager at Sloy, Dahl & Holst, on CNBC's "Fast Money: Halftime Report" on Wednesday. Meeks owns Facebook shares.

Investors are banking on Facebook's executive team to continue to grow revenue from core Facebook with new ad products and overseas margin expansion and to monetize Oculus, WhatsApp and the Facebook Messenger platform. Facebook remains JMP Securities top internet pick because of these near- and long-term catalysts, analyst Ronald Josey wrote in a note on Oct. 24.

Though Facebook is still tweaking its Messenger monetization strategy, brands have flooded onto the platform. Messenger has replaced a lot of the more public engagement that used to take place between brands and consumers on social media, and that trend will only increase, said Conversocial's March.

"Compared to all the other internet companies Facebook has the highest profit margin," said Baird analyst Colin Sebastian. "They have been able to control their costs in a very measured way and still drive very strong revenue off of a very massive base, so I think it warrants a high multiple because it's a high growth, premium asset."


David Wehner, CFO at Facebook.
Harriet Taylor | CNBC
David Wehner, CFO at Facebook.

Facebook is getting close to maxing out its ad load — the ratio of ads to user generated content — CFO David Wehner warned last quarter. This will start to impact revenue growth in the second half of next year, he said. Wall Street will be listening for more on this, said Mizuho analyst Neil Doshi.

"Maybe they're good enough that when the slow the ad load at core Facebook in the back half of next year, they start to bring the Messenger and WhatsApp monetization. But I don't think it will be impactful near term," Blackledge said.

User engagement — how much Facebook's 1.71 billion monthly active users use the app — is another thing investors watch very closely.

Most analysts believe Facebook's user engagement numbers remain steady. In the third quarter, the amount of time Facebook users spent on its flagship app held steady at levels 25 percent higher than Snapchat, Nomura analyst Anthony DiClemente wrote in a note to investors on Oct 17. Facebook's suite of apps also retook the top 4 spots in app downloads, he noted.

Despite the gains, U.S. visitors continue to decline, according to comScore data, cited by Mizuho's Doshi. Facebook had 205 million unique U.S. visitors in September, down from 206 million in August, and a 5 percent dip compared with September 2015.

"What we want to hear from Facebook… is engagement," Blackledge said. "And particularly, engagement at core Facebook. Remember, there's a lot of buzz in the investment community about Snapchat."

Blackledge said Cowen's proprietary data shows that in the 18 to 24 cohort, Facebook has more users than Snapchat.

"Aside from sharing content and video viewing, Facebook has broader use cases, namely news consumption is huge on Facebook and a big differentiator," Blackledge said.

Correction: This story was revised to correct the spelling of the last names of Joshua March and Anthony DiClemente and to update Facebook's monthly active user number.