Why investors will likely hit the 'like' button on Facebook earnings

FB Advertiser Growth Promises Strong 3Q16 Results

Indications are that FB has continued to enjoy very strong growth in 3Q16 with results expected out after the close on Wed 11/2/16. Street estimates call for revenues of $6.92bn (+54% year/year vs. 3Q15 $4.5bn) and EPS $0.97 (+70% year/year vs. 3Q15 $0.57). FB management indicated at the end of September 2016 that the total number of advertisers on the FB platform was 4mm, up +33% from 3mm at the end of March 2016. With such strong advertiser growth rates (approximately +77% annually), Street estimates are well-supported.

Teenage Audience Engagement for Facebook Softening, But Instagram Strong

One of the underlying demand factors key to FB traction is the extent to which it successfully engages with various audiences, in particular the teenage demographic. To this end, recent surverys indicate Facebook platform traction with teenagers is softening. According to recent survey work, "engagement is decreasing (52% vs. 60% in Spring 2016) among the teens surveyed, so factoring out shifts in the population surveyed, core Facebook usage likely declined by ~3ppts, indicating Facebook is gradually becoming less relevant vs. Instagram and Snapchat.”. The important point to bear in mind here is that FB owns Instagram. Further, teens indicating use of Instagram increased 5ppts in the Fall 2016 survey, slightly faster than Snapchat (4ppts). However, Snapchat remains teens’ favorite social network with 35% designating it as their favorite social media platform (vs. 24% in Spring 2016) and 76% indicating it in their top 3 (vs. 67%). In contrast, 24% of teens indicated Instagram as their favorite platform (vs. 23%) and 75% included it in their top 3 (vs. 67%). Instagram’s strength reflects the fact that Instagram and Snapchat have created two siloed use cases. Namely, Instagram is an aggregator of photos/videos and is “default public,” while Snapchat is a streamer of photos/videos and is “default private.”

Virtual Reality Promises Solid Long-term Growth

With its March 2015 $1bn acquisition of Oculus Rift, FB is off to a strong start in commercializing virtual reality (VR). Within two to three years, Facebook could be selling three different VR products at the same time, including one that is “all-in-one,” meaning that it doesn’t need to connect to a computer. With FB well established to develop the social media aspects of VR, we expect it to be a major driver of FB medium term growth.