Facebook: Bullish Ahead Of The Print

| About: Facebook (FB)

Summary

Facebook will report on Wednesday with consensus expecting $0.68 in EPS and $5.36b in revenue.

Key focuses for the quarter are MAU growth, video ads and messenger/VR.

FB remains the best idea in North American internet. Bullish ahead of the print.

Facebook (NASDAQ:FB) reports 4Q15 on Wednesday with consensus expecting $0.68 in EPS and $5.36 in revenue, +39% y/y. My view on FB is that its strong network effect, superior ad product, mobile penetration and long-term growth in virtual reality, mobile payments, wireless services and online video provides multiple catalysts for the stock. The ongoing penetration in mobile advertising and video remains intact with additional growth prospects coming from VR, Messenger, payment and potentially financial services within this decade. Each of these segments could potentially be as big as FB's existing ad business. The current share price does not reflect FB's potential.

As such, FB is my top pick within the social networking service vertical given its solid financials supported by the strong operating metrics. Long-term investors should consider FB since it is perhaps the best idea among the large-cap Internet companies.

Heading into the earnings MAU growth, video and VR will be three focus areas.

First, FB has consistently delivered active user growth in all geographic segments. Although developed markets such as North America and parts of Europe are starting to show early signs of maturity, I believe that most of the growth will be coming from emerging markets such as India and Latin America. Although the recent entry into India with free internet saw some challenges with the regulators, the key is to give the local government majority control on strategic assets (something that FB may not be willing to give up). However, given that the developed market is reaching maturity, emerging markets should be FB's medium-term focus and this is partially the reason behind the recent trips by the CEO to India over the past years to explore potential opportunities in the region. With over 1bn population (half of whom are under 30), educated workforce and large English-speaking group, India is an attractive growth market for FB given its near-term uncertainties in entering China.

Second, FB continues to steal ad dollars from TV (see - Facebook: Taking A Bigger Share Of TV Ad Dollars) and I expect video ad products to deliver another quarter of solid results. The recent product rollout of real-time sports is a positive as it could potentially open up FB acquiring sports media rights in the future, a scenario that is quite probable given FB's position as one of the largest media distributors globally. We saw clear signs of FB taking ad dollars from TV as the platform generated over 8b daily video views. Interestingly, over 500m people watch FB videos and over 80m photos are shared over Instagram on a daily basis, highlighting FB being a key platform for media consumption in the digital age. In addition, video consumption in FB could give the company the opportunity to venture into content broadcasting in combination with virtual reality.

Finally, non-core projects in Messenger and Oculus will be in focus. On the messenger front, FB is already ramping up its messenger with VoIP, P2P payment and local services that could make FBM competitive against the Asian messenger apps. Given that the O2O penetration in North America is lower than that in Asia, I believe that FB's focus on this area is the necessary catalyst for North America to narrow its gap with Asia. As for virtual reality, I expect questions to be focus on how FB is going to mass commercialize the Oculus Rift. Although the price appears to be reasonable (see - Facebook And Oculus Rift: The Price Is Right) it is still a product for the early adopters so analysts could focus on the launch of Oculus PC next month. In my view, virtual reality and social networking could be a game changer to FB as it brings social interaction to a whole new level and drive engagement higher.

Conclusion, remain bullish on FB ahead of results.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.