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Earnings Preview: What to Expect for Facebook Stock

If social media has an alternate universe, it could well be virtual reality. And Facebook (ticker: FB) hopes to conquer its own corner of the galaxy when its company Oculus releases the Rift headset in the first quarter of the year. (Some gaming websites report the date as March 28, though Oculus has kept launch details quiet.)

Too bad the Rift isn’t out now, and that it can’t look ahead in time to look back in time. Many investors are eagerly awaiting a more pressing reality: the earnings Facebook will report January 27 for the fourth quarter. And there’s little hesitation among Wall Street types to put on a happy Face(book).

Facebook rocks with revenue. With its third-quarter earnings report, Facebook beat Wall Street expectations, posting earnings of 57 cents a share (compared to the predicted 52 cents) on $4.5 billion in revenue. Last year, Facebook posted revenues of $3.85 billion in the fourth quarter, with EPS of 31 cents, beating analysts’ forecasts by 4 cents.

And so the analysts have responded this time around with an overwhelming collective endorsement. In the days leading up to the earnings report, 24 out of 30 label Facebook a “strong buy.” Facebook is undoubtedly a Wall Street star.

Yet if Facebook is “free and always will be” as its login page declares, how does it make any money? While it culls no direct revenues from users, Facebook makes plenty from advertising – nearly $4.3 billion in the third quarter. Meanwhile, its various properties continue to drive revenue. Aside from Oculus, Facebook owns WhatsApp, a mobile messaging app, and the ever-popular Instagram, a photo-sharing app service.

Though it paid a stunning $1 billion for Instagram in 2012, Facebook CEO and co-founder Mark Zuckerberg can rightly claim that the purchase has paid off. By itself, Instagram now has more than 400 million active users – an amount that surpasses Twitter’s (TWTR) 320 million monthly users. In retrospect, Facebook acquired Instagram for “a bargain-basement price,” says Robert Barone, co-founder of Universal Value Advisors in Reno, Nevada and a former professor of finance at the University of Nevada.

 “Instagram generates about $600 million in ad revenue, and is expected to grow rapidly in 2016, with some estimates as high as $1.5 billion,” Barone says. He adds that overall, Facebook still controls the lion’s share of U.S. mobile and desktop Internet time in the social media world – 16 percent as of November. “No other social media site even comes close.”

Is Facebook becoming a click-bait site? But that doesn’t mean Facebook has built an impregnable castle in the computing cloud. “The trouble lately is that dominance is down from its 20 percent peak share of Internet time just this past July,” Barone says. “This downtrend has become alarming for some of the investor class.”

Here’s one potential reason for the drop: “Facebook is becoming a click-bait website,” says Todd Antonelli, managing director of the Berkeley Research Group in Chicago. “It used to be cool and offer value. Now it’s becoming an outward ‘advert blaster’ versus an engaging conversation.”

Meanwhile, Facebook stock has shed close to 10 percent of its value so far in 2016. But that also puts it in the company of other tech powerhouses such as Apple (APPL) and Oracle Corp. (ORCL). Since Jan. 1, the stocks are off about 8 and 5 percent, respectively, in the wake of this month’s mini market crash.

 “I find it difficult to see a competitor unseat Facebook from its position of preeminence in the social media industry, but I have some reservations for the stock itself,” says Peter Frawley, financial consultant and senior vice president of CoreCap Investments in the greater Detroit area.

Frawley cites its price-to-earnings ratio of 95.7, compared to the Standard & Poor’s 500 index, which is currently about 22. “For Facebook’s stock price to be equivalent to the index ratio, it would need to have about a 473 percent increase in revenue,” he says. “That is unrealistic and reminiscent of the late ’90s tech bubble.”

But for all of 2015, Facebook stock enjoyed a steady climb with just a few stray bumps. It finished the year up more than a third – and since its May 2012 initial public offering, it’s gained 174 percent. Assuming you got in on the ground floor, that’s the kind of news worth posting on your next status update.

Zuckerberg takes the long view. And while Facebook could put the pedal to the metal so far as its stable of holdings is concerned, Barone favors the more organic approach the company has taken thus far. “Wall Street would like Zuckerberg to go faster in monetizing both Messenger [its mobile instant messaging service] and WhatsApp,” he says. “But so far, Zuckerberg’s instincts have proven to be the correct ones. Wall Street, of course, is frustrated by this long-term thinking.”

Regardless, the past few years have turned Facebook into a company far different from the one investors greeted when Zuckerberg rang NASDAQ’s opening bell on May 18, 2012. That year, media pundits slammed the Facebook IPO as one of the year’s worst. But today, the House that Zuck Built has a deeper reach into mobile, a solid advertising foundation, a major stake in the untapped market of virtual reality headsets and a track record of smart acquisitions that turned investor adversity into intelligent diversity.

How that will impact quarterly earnings this week remains to be seen. But this much is certain: “When you say Facebook,” Barone says, “you should clarify what you mean.”

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