Facebook (FB) has been doing very well over the past several quarters, beating expectations time and time again.
Consensus estimates for the second quarter put revenue $6.0 billion dollars, which represents growth of 48% year over year. Earnings per share are expected to jump 61% to $0.82 per share. This seems like a tall order, but they’re also growth figures that Facebook has matched or beat before.
However, looking at the longer term picture, it doesn’t matter as much if the earnings miss by a couple of percentage points, or beat by a bit either. In the long-run, analysts believe that it’s important for investors to focus on the performance of Instagram, which Facebook bought for $1 billion in 2012. Analysts also say investors should pay attention to app install revenue.
How’s Instagram doing?
Deutsche Bank analyst Ross Sandler points to concerns that social-media peer Snapchat is driving down engagement for Facebook’s properties such as Instagram. While Facebook does not break out revenue figures for Instagram yet, the monthly (MAUs) and daily active user (DAUs) statistics are given. Sandler further notes that these Snapchat fears have been around for a while, but both Facebook and Instagram have seen engagement continue to rise, quarter after quarter, with Instagram hitting half a billion MAUs recently.
Facebook has only recently started monetizing Instagram, and analysts are excited about the long-term revenue potential. After Q4 2015 earnings were released back in January, analysts raved about Instagram’s performance, and investors sent Facebook shares roughly 16% up.
How is mobile app install revenue?
App install ad revenue is a bit trickier to track, but equally important for Facebook’s future. As most know, Facebook makes its money from ads, and an important subcategory of those ads are app install ads. These are exclusively mobile ads, and they link to apps on the Apple app store or the Google Play Store. Developers buy these ads in an attempt to improve their own download figures.
The mobile app industry is awash in VC funding right now, with many big companies, such as Snapchat, Uber and Supercell exclusively on mobile.
There are also many smaller mobile game companies exclusively on mobile, and these are the most worrisome, as many may not be profitable. Back in 2014, Wired pointed out that we’ve seen this issue pop up before, during the dotcom bubble. Many smaller, VC-funded companies would buy ads on sites like Yahoo (YHOO). Once the bubble popped, and funding dried up, Yahoo saw its revenue shrink and its profit go from positive to negative within a few months.
Unfortunately, Facebook still does not fully disclose how much of its revenue comes from app install ads. However, Citi Research analyzed publicly available data from mobile app companies, and estimated that around 17% of Facebook’s revenue in 2015 came from app install ads. It’s significant.
Citi Research also points out that we may start seeing the impact of app install ads, given that smartphone sales having started to slow down and VC funding for mobile startups is starting to slow. down. Moreover, Apple and Google have introduced their own mobile ad advertising tools. Thus, Facebook may comment on the impact of app install ads, or it may be visible from its results over the coming quarters — even if the company does not fully disclose the amount of revenue it gets from them.
Disclaimer: Yahoo is the parent company of Yahoo Finance.
Rayhanul Ibrahim is a writer for Yahoo Finance.