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Facebook earnings: Expectations are high

Jessica Guynn
USA TODAY

SAN FRANCISCO — Facebook's mobile business is growing at such a heady clip that it has some competitors gasping to keep up.

A man poses in front of the Facebook sign on the company's campus in Menlo Park, Calif.

So it should come as no surprise that Wall Street is anticipating good things from the Menlo Park, Calif., company when it reports second-quarter financial results after the close of trading Wednesday.

The world's largest social network reported in April that nearly three-quarters of its advertising revenue and most of its 1.44 billion users hail from smartphones and other mobile devices. And Cantor Fitzgerald analyst Youssef Squali said he believes Facebook's mobile ad revenue amounted to 75% of total ad sales in the second quarter.

In addition to extending its dominance on mobile devices, Facebook has other promising levers it has begun to push: Advertising on photo-and-video sharing app Instagram and video advertising on Facebook. Analysts said they are hoping for details from Facebook management on both of those, though they are unlikely to get it.

"Our thesis is that while people are uniformly positive on the company and its prospects, we think even short term the company will do better than people realize," SunTrust Robinson Humphrey analyst Robert Peck said in an interview. Peck rates Facebook a "buy" with a $125 price target.

Facebook FB shares are up 22% for the year, closing Tuesday at $95.29.

The only knock on Facebook? Rising expenses.

STREET ESTIMATES

Wall Street expects Facebook to report adjusted earnings of 47 cents a share on revenue of $3.99 billion. That expected sales increase is up 37% from last year.

Facebook nearly always beats Wall Street sales estimates. The exception: It missed slightly last quarter.

As a result,  investor expectations are ahead of those from Wall Street brokerages. Sanford Bernstein analyst Carlos Kirjner said Facebook must deliver a "significant top line beat without material margin disappointments."

INSTAGRAM 

Research firm eMarketer expects the photo-and-video sharing app to make $595 million in global mobile ad revenue this year and $1.48 billion in 2016. In 2017, eMarketer expects Instagram to generate $2.81 billion in ad revenue for more than 10% of Facebook's overall ad revenue.

"We think there is pent-up demand for Instagram ads, especially from brand advertisers in leading consumer-interest areas like fashion, retail, entertainment, autos, etc.," Rosenblatt Securities analyst Martin Pyykkonen said in a research report.

VIDEO ADS

Last quarter, Facebook said it had 4 billion video views a day, but isn't saying how much revenue video advertising is bringing in.

Kirjner said Facebook certainly isn't getting as much as Google-owned YouTube, which is stiff competition for Facebook.

"Until Facebook successfully attracts original content/uploads, we think these ads will likely continue to be bid at a discount to YouTube," Kirjner said.

On the upside: Facebook is having "more active and continuous dialogue now with large brand advertisers and agencies,"  Pyykkonen said.

EXPENSES

Though Facebook is still a revenue story, scrutiny of the company's expenses is growing and investors will want a mid-year update.

Expenses will matter if Facebook does not beat consensus revenue or expenses are "surprisingly high," Kirjner said.

"Facebook has established investor goodwill that they can execute on their ambitious goals, but it will be incumbent upon them to prove that the decrease in margins — which we model as a long-term outcome — is occurring as the result of high leverage investments in ad-tech and new businesses," he wrote in a research report.

Last quarter, Facebook narrowed total expense increases for the 2015, reducing the high end of the range by 5 percentage points.

Follow USA TODAY reporter Jessica Guynn @jguynn

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