What to Expect when Facebook (FB) Reports Q4 Earnings?

Facebook, Inc.FB is set to report fourth-quarter 2016 results on Feb 1. The company reported a positive earnings surprise of 14.29% in the last quarter. It has also delivered an average positive earnings surprise of 21.11% over the trailing four quarters. Let's see how things are shaping up for this announcement.

Factors to Consider

Online and mobile advertising revenues will continue to be in focus in the upcoming quarterly earnings release. Facebook's mobile ad business has become the mainstay of its advertising revenues. Mobile monetization has increased with a higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads. Notably, in the third quarter, mobile ad revenues were $5.7 billion (up 70% year over year), contributing 84% to total ad revenues. Facebook has over 4 million active advertisers and over 60 million active small and medium size businesses (SMBs) of which 85% are active on mobile.

Reportedly, Facebook is testing a new ad platform - mid roll format - whereby publishers will be able to put in ads in a video (which has a minimum duration of 90 seconds) after a user has played it for 20 seconds or more. Facebook might share revenues with publishers in a 45:55 ratio, similar to Alphabet's GOOGL YouTube.

Facebook's push into "live" is expected to be a big contributor to the top line. Facebook has been aggressively promoting "Live" in order to capture the opportunity presented by ever increasing video viewing on social media platforms. Apart from Live, Facebook also launched Live Audio last quarter. Also, it has forayed into enterprise software by launching Workplace . Facebook also upped its ante in the social commerce area with the launch of Marketplace .

Facebook has just started to monetize Instagram. Since it opened Instagram's ad platform to worldwide advertisers last year, it has emerged as an important cash cow for Facebook. Investors will once again be focused on Instagram's money minting abilities to boost overall ad revenues for the company. After Instagram, investors will be looking at the company's detailed monetization efforts for Messenger & WhatsApp (both 1 billion plus user platform).

Facebook's huge user base of 1.8 billion enables it to fend off any competition. However, with the user base already at sky high levels, a relative slowdown is imminent. Also, it is approaching full penetration in North American and European markets. However, growth in Asia and rest of the world should help cushion user growth in the foreseeable future.

Facebook was never intended to be just a social media service. In the past few months, Facebook has more than ever clearly highlighted its ambitions of becoming a tech powerhouse. We continue to be impressed with Facebook's efforts to develop cutting edge AI & AR/VR technology. Facebook split Oculus into two and snapped Hugo Barra to head all its VR initiatives as well as Oculus. Facebook also said it will spend over $3 billion in the next 10 years to develop VR technology.

However, despite all these growth catalysts, Facebook faces a number of challenges. Facebook needs to tread cautiously so as not to irritate users with too many ads. Plus, in the past few months, there have been several "miscalculations/discrepancies" in Facebook's advertisement metrics ranging from miscalculating the average time spent by users watching videos and "misallocating" the extra reactions per user during live broadcasts in the "Reactions on Post section, instead of "Reactions from Shares of Post section." Facebook's disclosures sent advertisers and publishers into a tizzy. To alleviate the anxiety of advertisers and publishers, Facebook has increased third-party verification.

However, Facebook is expected to maintain the cautious stance on ad growth going ahead. At the last earnings, management had said ad load will no longer be a big contributor and consequently ad revenue rates will "come down meaningfully."

Earnings Whispers

Our proven model does not conclusively show that Facebook is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Facebook has an Earnings ESP of -0.89%. This is because the Most Accurate estimate stands at $1.12 whereas the Zacks Consensus Estimate is pegged at $1.13 cents.You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Facebook's Zacks Rank #2 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

Please note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Facebook, Inc. Price and EPS Surprise

Facebook, Inc. Price and EPS Surprise | Facebook, Inc. Quote

Stocks to Consider

Here are some stocks that, as per our model, have the right combination of elements to post an earnings beat this quarter:

Oclaro, Inc. OCLR with an Earnings ESP of +10.53% and a Zacks Rank #2.

Qorvo, Inc. QRVO with an Earnings ESP of +0.94% and a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank stocks here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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