Facebook Stories: Instagram, WhatsApp And The Shift To Video

Facebook Inc FB investors are continuing to see strong results after an earnings beat Wednesday, with shares now trading 40 percent higher on the year. However, while BMO Capital Markets analyst Daniel Salmon sees Facebook as a big beneficiary of digital video’s secular growth story, he remains on the sidelines.

“As Messenger monetization slowly begins, FB is moving away from its core News Feed model, making this fresh territory for learning about users' interaction with ads. While we believe it will take time to find the right formats and appropriate experiences for ads, the familiarity of FB's ad platform to its 5mm advertisers will be vital,” Salmon wrote. “But we expect the near-term driver to remain the shift to video and thus the expected launch of exclusive premium content later this year remains our near-term focus.”

Salmon maintains his Market Perform rating with a new $170 price target.

A Closer Look At Q2 Results

Advertising Still Part Of The Growth Story

• Revenue: $9.3 billion vs. $9 billion estimate
• Total Ad Revenue: Up 47 percent, with mobile representing 87 percent
• Adjusted EBITDA: $6.2 billion vs. $5.4 billion estimate
• GAAP EPS: $1.32 vs. $1.07 estimate
• Guidance: “Key focuses for investment remain headcount additions (especially in R&D) and also video content, which will begin to hit in 2H with the reported "hero" and "spotlight" content initiatives. Management now expects to come in at the low end of the capex guidance range of $7–$7.5Bn,” Salmon said.

While Facebook currently has 5 million advertisers on its platform, Instagram is only at 1 million, showing room for further growth.

“The continued expansion of third party measurement (especially for viewability) is helping tap down concerns in the ad community and will be even more vital as premium content grows on the platform and underpins more branding campaigns,” Salmon noted.

Additionally, ad monetization on Messenger (and eventually WhatsApp) should ramp up slowly. Salmon highlighted if Facebook “can tap into commercial intent behavior driven by incoming interactions with businesses, then it will be a boost to conversions and thus pricing over the long term.”

With all that being said, Salmon sees too many risks ahead to justify a Buy rating. Specifically, he highlighted, “the potential content costs necessary to drive TV budgets to the platform, a lack of visibility into monetization at Messenger and WhatsApp, and the emergence of Amazon's advertising business.”

Oppenheimer Analyst Has A Different Tone

“The good keeps on getting better (again),” Oppenheimer analyst Jason Helfstein wrote as he maintains his Outperform rating and raised his price target to $195.

A few of the notable highlights Helfstein pointed out include the 15 million business profiles on Instagram, six-second mobile native ads proven to be effective and video helping drive price and engagement.

Overall, Facebook is helping lead Wall Street to another positive day Thursday, as it was seen up 5 percent at $173.94. To take a deeper look into Facebook’s earnings metric and to read the latest financial news, start your free trial of Benzinga Pro.