Ahead of the Tape: Yet More Reasons To Like Facebook -- WSJ

Warnings of higher spending and slower revenue growth normally don't bode well for a company's stock price. That is unless you are Facebook Inc.

The social network's shares have surged 33% so far this year. Already a digital-advertising powerhouse, Facebook is now benefiting from sharpened focus on its photo-sharing app Instagram. That has catapulted the social network's market value north of $440 billion, the fifth highest in the S&P 500 and topping Warren Buffett's Berkshire Hathaway Inc.

More good news is expected Wednesday when Facebook reports quarterly results. Analysts polled by FactSet estimate first-quarter earnings of $1.12 a share, up 45% from a year ago. Revenue is expected to have increased 45% to $7.8 billion. Facebook has noted that revenue growth is expected to "come down meaningfully" this year as it reaches the limit on how many ads it can show in its news feed. Analysts forecast year-over-year growth of 33% in the back half of the year.

But the positive news surrounding Instagram, particularly as it relates to rival Snapchat parent Snap Inc., is what has investors excited. Facebook doesn't break out Instagram results specifically, but it recently noted that the app has more than 700 million total users, doubling its user base in two years with growth accelerating recently. And " Instagram Stories," a direct competitor to Snapchat launched last summer, now has 200 million daily active users, already surpassing those on Snapchat.

Instagram gives Facebook yet another outlet to show its ads. The app is forecast to generate $3.9 billion in global advertising revenue this year, a 106% increase from a year ago, according to eMarketer Inc. By comparison, Snap is only expected to generate $1.03 billion in revenue this year.

It isn't just Instagram that is thriving. Facebook's flagship app and Instagram, as well as Messenger and WhatsApp, were the four most-downloaded apps in the first quarter, according to Anthony DiClemente, an analyst at Nomura Instinent. Snapchat was a distant fifth as Instagram's lead expanded.

The number of Instagram downloads in the first three months of the year increased 5.1% from the prior quarter, while Snapchat's declined 1.3%, according to Mr. DiClemente. Snap's shares are down 11% from its first-day close even as Facebook has risen 11%.

Granted, there are risks. The social network is counting on growth from video with hopes of winning over traditional television advertising dollars. That is no sure thing, particularly as the company grapples with violent videos and fake news.

Its shares aren't cheap either, fetching 26 times projected earnings over the next 12 months. But a rich multiple hasn't stopped investors in Facebook's nearly five-year history as a public company. If anything, the current valuation is more compelling as it is roughly 30% cheaper than its average since its May 2012 initial public offering.

There is still plenty to like here.

Write to Steven Russolillo at steven.russolillo@wsj.com

(END) Dow Jones Newswires

May 03, 2017 02:48 ET (06:48 GMT)