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Facebook earnings: What to watch

Jessica Guynn
USA TODAY
A logo of social networking Facebook is displayed on a laptop screen inside a restaurant in Manila.

SAN FRANCISCO — Wall Street is expecting a strong fourth quarter from Facebook when the giant social network reports financial results after the market closes Wednesday.

Analysts are forecasting earnings of 49 cents a share.

Quarterly revenue is expected to rise to $3.77 billion from $2.59 billion a year ago. If so, Facebook will top $10 billion in annual revenue for the first time.

The stock is up nearly 150% over the past two years and Facebook's value has risen to $215 billion.

What to watch:

Spending: Chief Financial Officer David Wehner spooked investors when he warned that expenses could rise as much as 70% in coming quarters. CEO Mark Zuckerberg says Facebook plans to invest aggressively in 2015, buying new companies, hiring new workers and developing new technology, sometimes in experimental areas such as virtual reality.

SunTrust Robinson Humphrey analyst Robert Peck said the uptick could add $1 billion or more to the spending levels investors expected.

Still, Wall Street has cut Facebook some slack — at least so far.

"It is still primarily a revenue growth story and we think the evolution of expenses and margins will only matter if Facebook misses the top line," Sanford C. Bernstein analyst Carlos Kirjner wrote in a research report.

Mobile advertising: In the fourth quarter of 2013, mobile advertising represented over half of all advertising revenue for Facebook. In the same quarter this year, analysts expect mobile ads to account for two-thirds or more of all ad revenue.

RBC Capital Markets analyst Mark Mahaney calls the growth of Facebook's mobile advertising business "one of the most impressive pivots we have seen in Internet history."

He expects mobile to reach 68% of total ad revenue in the fourth quarter.

"We think Facebook remains well positioned to gain significant share of online advertising, particularly mobile advertising." said Sterne Agee analyst Arvind Bhatia.

He predicts Facebook mobile ad revenue will grow 59% in 2015 and could top 80% in the next two years.

"Facebook's recently launched mobile ad network called Facebook Audience Network will likely prove critical to this. In fact, Facebook has made it clear it wants to be the very fabric of the mobile ecosystem," Bhatia said.

Facebook accounted for 14.4% of all mobile ad dollars spent in the U.S. in 2013, according to research firm eMarketer. It grew its share to 17.6% in 2014. Google remains top dog, accounting for 37.2% of all U.S. mobile ad dollars last year, eMarketer says.

Instagram, Messenger, WhatsApp: Zuckerberg has warned Wall Street that he won't try to make money from these apps right away. But analysts see the potential for big pots of money.

Instagram has grown to 300 million users and began focusing on advertising last year. Analysts expect the photo-sharing service to get serious about advertising revenue in 2015.

WhatsApp recently said it has reached 700 million users and analysts believe it could reach 950 million users or more by year's end. But they remain skeptical that Facebook will try to milk the service for revenue this year.

They are keeping a close watch on Facebook messaging app Messenger, which analysts speculate may soon begin selling ads.

Video ads: Marketers are increasingly turning to online video ads, and analysts believe those ads could produce as much as $1 billion for Facebook in 2015 as the giant social network looks to capture a share of advertisers' television budgets and compete with Google's YouTube.

Digital video advertising in the U.S. rose 56% in 2014 to $5.96 billion, according to eMarketer, reaching nearly $6 billion. YouTube accounted for almost 19% of that market. The market is expected to grown another 30% in 2015 to nearly $7.8 billion.

Facebook appears poised to capitalize on video. People watched 3.6 times more video content on Facebook last year and there were 75% more video posts per person.

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