What Makes Deutsche Bank Worry About Facebook's First Quarter?

Ross Sandler of Deustche Bank says the first quarter results of Facebook Inc FB "may come in light," offering investors an "opportunity to add to positions below current levels."

"A combination of strong sentiment (the most consensus long in large cap internet currently), high quarterly revenue expectations, and our mixed channel checks, lead to an unfavorable set up," Sandler wrote in a note.

However, the analyst noted that "stepping back from 1Q's potential growth reset, we see few names with as much multi-year revenue runway as FB, hence we would add to positions on any weakness."

Sandler said his $5.06 billion (+53 percent year-over-year) ad revenue estimate is slightly below consensus and buyside expectations, and he sees potential downside risk.

"We think investors are extrapolating that the strength from 4Q is secular vs. our view it was well above trend-line and growth rates may revert back lower," Sandler highlighted.

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The analyst continued, "checks have pointed to strong seasonal trends in travel (with travel DPA recently rolled out), offset by softness in retail, agency and select other channels. Instagram appears to be largely incremental, with many DR advertisers running separate experimental campaigns, but not enough to move the needle on overall growth."

"Our $0.62 EPS estimate should be achievable, along with EBITDA of $3.17B, given the opex guidance and our flattish y/y margins. Typical FB "miss buyside expectations" quarters are followed by temporary weakness that often gets bought, we think 1Q could be a tad worse, but generally the same dynamic," Sandler added.

Looking ahead, the analyst said the next few years should be strong as revenue moves from the flagship app to multiple areas.

"We have estimated (but not yet added to our model) that Messenger and WhatsApp could reach $10B combined revenue run rate by 2020, and we'll likely see more evidence of the messaging platform and chat bot strategies at F8. 2015 was the Instagram revenue on-ramp, and 2016 should be the full deployment phase."

"Messenger appears to be 1-1.5 years behind, but with a much larger audience and higher daily engagement, and WhatsApp likely even bigger but 2-3 years out. We forecast Oculus to sell 1m units for 2016, trailing PSVR, but off to a strong debut," Sandler noted.

Sandler has a Buy rating and $145 price target on Facebook shares.

According to Tipranks, Sandler has a success rate of 59 percent, with average return per recommendation of +6.1 percent. He is ranked 314 out of 3,844 analysts.