Ahead of tomorrow’s earnings release for Facebook (FB), there is little worry among investors. After all, the Street is looking for a hefty 36% jump in revenues to $4.37 billion. And yes, FB stock has already had a nice run. It’s jumped from $89 to $103 during the past month.
While there are many keys to the success of FB stock — such as general robust user growth, the efforts with properties like WhatsApp and the experiments with Oculus Rift — the most important factor looks to actually be video.
It’s essentially becoming the battleground for the mega shift in ad dollars to digital. Let’s face it, video allows for much more immersive ads. But mobile is also a major driver as more and more people use their smartphones for streaming.
Interestingly enough, there are several near-term catalysts that should help boost FB stock with its video efforts. Of course, there is the upcoming holiday season, where there will likely be much more spent on ad spending. But there will also be the upcoming elections.
So expect lots of talk on the Facebook earnings call regarding all this.
Why Video Is So Important to FB Stock
But it seems like a good bet that the tenor will be mostly upbeat. Facebook has a huge advantage in the war for video — 1.5 billion monthly active users. In fact, during the past month, the company had its first day where a billion users visited the site.
The recent trends at Instagram are also encouraging, with the number of users going from 300 million to 400 million for the year. The app has become extremely popular with the millennial generation, which is a demographic that is becoming increasingly uninterested in Facebook as a social network.
So for advertisers, FB offers huge scale. But there are also opportunities for hyper-targeting, such as with interests, geographies, behaviors and so on. The fact is, perhaps only FB and Alphabet (GOOG, GOOGL) can offer such advantages, which has put other social operators like Twitter (TWTR) at a disadvantage.
No doubt, Mark Zuckerberg has shown that he can move his company swiftly, as seen with the aggressive initiatives on the mobile front. But the same has happened with video. Already Zuckerberg has introduced auto-play ads, added new ad formats and has built out the ad-monetization engines.
But the innovation has actually accelerated lately.
For example, FB recently added curated video to Instagram, which is similar to Snapchat or Twitter’s Moments. There have also been other interesting features included in the core FB platform like live-streaming, user profile videos and even 360-degree videos.
All in all, the long-term prospects for online video are hard to argue with. According to research from ZenithOptimedia, the market for online video is expected to grow at an average 29% per year until 2017. By that time, the market should be about $23.3 billion.
And yes, FB is lock-and-loaded to capitalize on this. Yet there should still be some caution.
In other words, it’s probably not a good idea to rush to buy FB stock ahead of the earnings report. Again, there has already been a run-up, which is partly due to the strong earnings from GOOGL.
Besides, the Street can still be temperamental with even the slightest miss, as seen with Netflix (NFLX). So it is probably best to wait for some type of pullback before getting in FB stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
