What to watch for in Facebook’s earnings

Facebook Inc. is set to report fourth-quarter earnings after the market close Wednesday.

Facebook FB, +0.42% has a long history of beating Wall Street expectations, and Bank of America told clients in a note on Monday to “expect another solid quarter” as the company continues to benefit from ads on its native platform and Instagram.

But as strong as the company has been, there remain challenges. Bank of America analyst Justin Post estimated that Facebook would need to report revenue of at least $5.43 billion — versus the FactSet consensus estimate of $5.37 billion — just to keep its stock momentum going.

Management could also tone down its 2016 outlook due to recent macroeconomic and market uncertainties. SunTrust Robinson Humphrey analyst Bob Peck lowered his price target on Facebook to $120 from $125 this week to reflect recent market uncertainties.

The consensus is overwhelmingly bullish on Facebook. Both Peck and Post reiterated buy ratings this week. And the average rating on the stock in a FactSet survey of more than 40 analysts is the equivalent of buy.

Here’s what to expect:

Earnings: Analysts expect Facebook to report earnings per share of 68 cents, an increase from 54 cents in the year-earlier period. Estimize, a fast-growing software platform that uses crowdsourcing to track earnings estimates from hedge-fund executives, brokerages, sell-side and buy-side analysts, has Facebook earning 68 cents a share.

Re venue: Sell-side analysts polled by FactSet expect Facebook to report revenue of $5.37 billion, versus $3.85 billion in last year’s fourth quarter. Contributors to Estimize expect sales to grow to about $5.36 billion. Advertising takes up the lion’s share of Facebook’s revenue. Its advertising revenue jumped 45% year-over-year last quarter to $4.3 billion.

Stock reaction: Shares of Facebook are down 7% over the last three months, which is mostly a reflection of broader macroeconomic concerns that have pushed the S&P 500 down 8.5% over that same period. Over the last year they have vastly outperformed the S&P 500, however, rising roughly 24% versus an 8% decline for the index.

What to watch for: Monthly active-user growth, user engagement and ad revenue will be under the microscope this quarter. While the company mostly recently reported 1.55 billion monthly active users, which dwarfs the active-user totals of Facebook’s social-media competitors, such as Twitter Inc. TWTR, +0.06% , with 320 million, and LinkedIn Corp. LNKD, +1.34% , with 400 million, the consensus estimate on FactSet is calling for deceleration this quarter.

CNBC