What to Watch When Facebook Reports Earnings on Wednesday

By Adam Levy Markets Fool.com

Facebook (NASDAQ: FB)shares are trading near an all-time high ahead of the company's first-quarter earnings report on Wednesday. Analysts have high expectations that Facebook can continue to grow revenue at a rapid pace, although they do expect a slight slowdown. Meanwhile, Facebook warned revenue growth could slow "meaningfully" as it's forced to look for new places to put ads besides users' news feeds.

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Here's a roundup of what investors should look for when Facebook reports earnings.

Image source: Facebook.

What Wall Street expects

Despite management's warning of the potential for slowing revenue growth, Wall Street is still expecting a big quarter from Facebook.

Metric

Estimate

Q1 2016 Results

Revenue

$7.83 billion

$5.38 billion

Earnings per share

$1.12

$0.77

Monthly active users

1.91 billion

1.65 billion

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Data sources: Yahoo! Finance and Barrons.

Analysts think Facebook will increase revenue another 45% year over year in the first quarter. While that's a slight slowdown from the 52% revenue growth Facebook posted in the first quarter last year, it's still a strong pace. That's especially true considering the size of Facebook. The company generated $27.6 billion last year, and analysts believe it will generate $37.9 billion this year.

User growth, meanwhile, is accelerating even with 1.86 billion users. Analysts expect Facebook to add another 50 million or so new users, growing around 16% year over year. That's a slightly faster pace than the first quarter last year, but a small slowdown from the fourth quarter. With Facebook's challenge of putting more ads in News Feed, user growth can help offset some of the pressure on ad revenue.

Key developments last quarter

Facebook is continually adding new features to its products, and last quarter was no different. Some of the biggest developments include broader tests of midroll video advertisements and expanding the Stories format to more apps.

Midroll ads offer Facebook an opportunity to squeeze in more ads. The News Feed has become heavily focused on video, and Facebook now has a dedicated section just for videos. As more users watch video on Facebook, the company needs to find a way to effectively monetize that time spent in the app.

After seeing great success with Instagram Stories -- a format directly copied fromSnapchat -- Facebook started putting the feature in all of its major apps. Both Messenger and WhatsApp received their own versions, as did Facebook's flagship app. Instagram Stories usage continues to grow, hitting 200 million daily users, but Facebook hasn't provided an update on any of the other apps.

Facebook also reached major milestones in each of its apps. Both WhatsApp and Messenger boast 1.2 billion monthly users, and Instagram recently reported 700 million monthly users. Facebook also announced surpassing 5 million active advertisers on Facebook and 1 million on Instagram.

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What to listen for on the earnings call

Aside from the regular financial reporting, investors should look for commentary from management on a few key areas.

First, management should provide an update on how they foresee the ad load saturation challenge playing out. Will midroll video ads help offset the pressure? Can Facebook pull other levers, such as price, as advertisers continue to flock to the platform? How much ad load is left on Instagram? Management may not answer all (or any) of these questions, but it could give us some hints.

Second, look for commentary on whether the company is any closer to monetizing Messenger or WhatsApp. CEO Mark Zuckerberg said it's closer to monetizing Messenger than WhatsApp during the fourth-quarter earnings call. Messenger Day -- the stories feature in Messenger -- opens the door for near-term monetization, but ultimately Facebook wants to increase interactions between users and businesses on both Messenger and WhatsApp.

Finally, look for commentary on video. Facebook is reportedly replacing its live-streaming deals with publishers with new deals asking for more pre-recorded content. The idea is to push its new video section and midroll video ads. Again, midroll video ads are key to combatting the pressure from ad-load saturation.

Facebook looks poised to post another quarter of excellent revenue and profit increases, but investors need to watch for a few things to ensure Facebook's huge growth can continue.

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Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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