Facebook's Next Big Bet

By Steven Russolillo Technology Dow Jones Newswires

3D-printed models of people are seen in front of a Facebook logo in this photo illustration taken June 9, 2016. REUTERS/Dado Ruvic/Illustration (Copyright Reuters 2016)

First it was desktop. Then it was mobile. Next up on Facebook Inc.'s quest for world domination: video. 

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Strong advertising growth, with a vast majority of it driven by mobile, has propelled the social network to become the sixth-biggest U.S. corporation by market value. But even Facebook acknowledges that it won't be able to maintain its current trajectory without clogging people's news feeds with too many ads. 

Now it is betting on video, with the aim of swiping television ad dollars to keep up growth. With Facebook due to release fourth-quarter earnings on Wednesday, investors should watch this space. Any stumble won't be well received, particularly with shares nearly priced for perfection. 

Analysts polled by FactSet estimate earnings of $1.31 a share, up 65% from a year ago. Revenue is expected to have increased 46% from the prior year. 

No other large S&P 500 company can match Facebook's top-line growth. Alphabet Inc. and Amazon.com Inc. are close, but they still manage less than half of Facebook's pace. 

Facebook acknowledges that heady growth won't last forever. It has warned that it will stop showing users more ads in their news feed, which it says will prompt advertising growth to "come down meaningfully" later this year. That puts the onus on its video endeavors, including Facebook Live. Chief Executive Mark Zuckerberg has said he envisions the social network morphing into a "video-first" company. 

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With that in mind, the company already is making adjustments to attract ad money from TV advertisers. In an update published last week, Facebook said it would tweak its news feed to favor longer videos and, in particular, videos that people are watching closer to the end. It acknowledged that longer videos "may see a slight increase" in Facebook feeds, while shorter views could see "a slight dip." Long videos provide more time to stick in ads. 

Uncertainty about whether they can attract those ads is one of the biggest risks facing the stock price. The Wall Street Journal has reported that some content owners have resisted making deals due to concerns about advertising arrangements. Algorithm tweaks and how they impact content distribution are another risk. There also have been several measurement discrepancies in recent months. 

With shares hovering near a record, few seem overly concerned at the moment. But the highflying stock has also had more tempered moves of late. Shares rose 10% last year, the smallest calendar-year gain in Facebook's short history as a public company. Fetching 24 times projected earnings over the next 12 months, Facebook is pricier than rivals Microsoft Corp., Alphabet and Apple Inc. 

There is still a lot to like, but not at this price.

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