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Facebook Inc (FB) Q3 2015 Earnings Preview: Video Ads, Instagram Could Drive Revenue To $4.37B But Investors Worry About Spending

Facebook Inc. has been talking about video since 2013. Most recently, Chief Operating Officer Sheryl Sandberg referred to the Facebook app as a daily Super Bowl on mobile phones. Now, as the global social network gets ready to report third-quarter results, analysts say they'll be looking for TV advertising dollars to start boosting its bottom line.

Facebook, which will report after markets close Wednesday, will no doubt try to focus minds on two big numbers: 4 billion (the number of video views each day) and 1 billion (daily unique users). And while Sandberg recently said Facebook prioritizes results, not clicks, it's Facebook's massive audience, and all of its data, that is expected to supercharge revenue growth for the company.

Facebook revenue is expected to reach $4.37 billion, up by 36 percent year over year, this quarter, according to analysts’ estimates collected by Yahoo Finance. Earnings per share are estimated to hit 52 cents, up 21 percent year over year.

Over this year, Facebook’s stock price has risen up to about 33 percent, propelling the company to join Apple, Alphabet (Google) and Microsoft in the “$300 billion tech club.” That quick rise, however, has some analysts worried about risk -- notably in the company’s spending.

“We all know it’s mobile, it’s video, Facebook is king of the world,” said Tom Taulli, an analyst for InvestorPlace.com. “Where are they at in terms of spending? Things aren’t getting any cheaper in Silicon Valley. We’ve already seen Google take a step back. I think the stock has gotten ahead of itself. That’s a big risk.”

Finding The Money

Facebook’s growth has been fueled by mobile ad revenue, and it’s only increasing. Just as for Facebook’s second-quarter earnings report in July, Nanigans, an ad software company, found that the ads are drawing more clicks than ever before. Facebook’s click-through-rate was up 69 percent year over year, growing from 0.56 percent to 0.96 percent, Nanigans reports.

Not only is Facebook touting improved targeting, such as a new measurement tool called “advertiser outcome score,” the company has also added more advertising options. Facebook’s photo-sharing app Instagram opened advertising to all marketers in September and introduced 30-second video ads.

“For Facebook, there’s been a heavy emphasis on new ad types. They are taking all these steps on how we can drive more from the news feed,” said Tom Edwards, chief digital officer of agency business for marketing company Epsilon.

The expansion is working, for now. Ad spending from the same advertisers analyzed by Nanigans has increased 16 percent since last quarter, and mobile advertising spending is up by 10 percent from July’s report. Advertisers are also increasingly moving money to markets outside of the United States, up by 5 percent, according to Nanigans.

The growth of advertising abroad follows Facebook’s greater push to move into international markets, most notably emerging markets, as growth in the United States has plateaued. The company announced in September, three months after opening an office in Johannesburg, that Facebook’s total user base in Africa is about 120 million monthly active users. Facebook also introduced a lightweight video ad product, specialized for areas with slower wireless connections.

Facebook may also find new dollars in e-commerce. Business’s Pages are now being mobile-optimized, and the site added a “shopping” tab to the mobile app. Yet, some analysts are skeptical of Facebook becoming a destination shopping site.

“Google is a no-brainer as to what they give their customers. People are likely searching for a product, price or recommendation. Facebook isn’t used as much -- if at all in certain segments -- for getting advice on buying things,” wrote Kim Forrest, VP and senior equity analyst at Fort Pitt Capital Group, in an email.

Search has become more open on Facebook. Earlier this month, the company released all 2 trillion public posts for users' to access through the search tab on the site and mobile app. 

The Big Expense

With Facebook spreading into new markets and industries comes concern about what it could means for expenses. Indeed, in the last quarter, analysts’ inquired about Facebook’s $2.8 billion spending, up by 82 percent year over year. In July, Facebook’s Chief Financial Officer Dave Wehner pointed to the acquisition of WhatsApp as a major contribution. The startup cost Facebook $19 billion, and the company has yet to enact a major money-making strategy for it.

Meanwhile, the team’s been retooling Messenger as the go-to messaging app -- with GIFs, payments and artificial intelligence. “They’re turning Messenger into a mobile hub similar to what WeChat does in China. WhatsApp remains as the simple messaging app. The audience size is so big, yet the experience is so simple,” Edwards said.

Another big expense for Facebook -- the $2 billion acquisition of Oculus -- is also nearing its market debut. The consumer version of the virtual reality headset is expected to ship in the first quarter of 2016. As for content on the product, Facebook announced partnerships with 21st Century Fox, Lions Gate Entertainment, Netflix and Hulu in September.

“While some investors have expressed concern about the CY16 expenses guide as it relates to Oculus hardware, we are more focused on the health and trajectory of the core advertising business, where we continue to see significant runway,” Goldman Sachs wrote in a research note, according to Silicon Valley Business Journal.