- Facebook will report its Q2 2016 earnings on Wednesday after markets close.
- The company’s business is in a great position, but analysts are pessimistic about future growth.
- Investors should focus on Instagram, live video, and Oculus.
Facebook (NASDAQ:FB) is marching into this upcoming earnings release on Wednesday in a unique situation. The stock has outperformed the market YTD (Year-To-Date) and yielded more than 15% YTD, Messenger and Instagram are rising, and Oculus’s sales are going as expected, yet analysts downgraded the stock and vocally sounded their concerns about the stock reaching its peak and growth starting to slow down.
To understand the dichotomy between the business’s phenomenal progress and the market’s concerns, we need to track Facebook’s progress across different businesses. On the social media front, Facebook had made significant progress with Messenger that crossed the 1 billion monthly active users (MAUs) bar this month and joined Facebook’s club of social platforms with more than 1 billion MAUs including WhatsApp and the Facebook-branded platform.
Facebook’s initial plans to develop Messenger as a standalone platform that contains third-party apps, ads, and e-payment/e-commerce are starting to materialize thanks to former PayPal president David Marcus. Facebook integrated a Venmo-like P2P money transfer feature a while ago, and it recently added sponsored chat bots, sponsored messages, and ads on Messenger in a long-term effort to make Messenger a revenue-generating business.
Messenger’s monetization progress is slowly moving in the direction of Instagram, which is believed to be growing its ad revenue rapidly. UBS analyst Eric Sheridan estimates that Instagram is expected to increase at an incredible pace of 66% QoQ, which is much higher than the total revenue growth of 11% QoQ that the market consensus reflects. With Instagram being one of Facebook’s growth drivers and Messenger potentially following its lead, these two businesses will be two of the focus areas of this earnings release with Instagram receiving most of the spotlight.
As Facebook’s network of social platforms grows, its biggest competitor, for now, seems to be Snapchat. The upcoming photo-video messaging app quickly charmed its audience base and even passed Twitter in MAU figures. While Facebook leads the live video-streaming trend in social media, Snapchat is right behind it, and even though it has substantially fewer users than the Facebook network, Snapchat users are more active and create more video content than Facebook’s users.
To compete with Snapchat instant videos, YouTube, and Twitter’s Periscope, Facebook decided to compensate its live video stars to further accelerate the adoption of the service among Facebook users and to drive future revenues. As the Facebook live video feature is becoming popular among music artists, government officials, and sports players around the world, it is also the live-stream app of choice for many news events, as we recently witnessed with Turkish President Erdogan’s interview via Facebook live video during the coup attempt in Turkey. As this is an emerging business and a new potential revenue stream, investors should follow the progress in this business.
Another item that will receive close attention is the virtual reality business and how Oculus Rift is ramping up. Oculus accepted pre-orders a few months ago and encountered an “unexpected component shortage” that caused many shipments to be delayed for months, making the Oculus launch a complete mess. Earlier this month, Oculus announced that all pre-orders were shipped, and new orders will take 2 to 4 business days to arrive. It will be fascinating to see how the Oculus headset sold in the second quarter and how the company expects it to sell in the future.
As I mentioned above, in spite of the impressive progress the company has made, many sell-side analysts are becoming a bit skeptical of the company's earnings. Some say that Instagram's growth is lower than current estimates suggest and that it does not play a big role in Facebook’s top-line growth. Others state that Snapchat is a real threat not only to Instagram but also to the live video business of Facebook. The failed launch of Oculus also put out hopes that Facebook will soon manage another lucrative business. With very impressive business growth amidst a lot of skepticism from investors, Facebook’s earnings conference will revolve around three things: Instagram's growth, the live video business, and Oculus progress.
These are the comparable figures to follow in this earnings release:
|Q2 2016 Consensus||Q2 2015 Actual|