SunTrust's Bob Peck Expecting 'Strong' Q3 From Facebook

• Facebook Inc FB shares have gained 16 percent in the last six months, even after hitting a low of $82.09 on August 24.
• SunTrust Robinson Humphrey’s Robert S. Peck maintained a Buy rating on the company, with a price target of $125.
• The company could report robust 3Q results, and its revenue prospects for the future are boosted by the Instagram rollout, Peck said.

Analyst Robert Peck mentioned that discussions with industry participants suggest that Facebook would report another strong quarter, with solid growth being driven by mobile. He expects the company to record 10 percent sequential ad revenue growth, marginally beating the consensus estimate of about 9 percent.

Checks with Facebook PMDs indicate sequential revenue growth of 11-15 percent, with the upside being driven by strong mobile pricing and volumes “with particular strength in targeting and video ads as well as high interest in Instagram,” the analyst wrote.

While Facebook’s core growth remains strong, investors are focusing on “the potential inflection points,” which are:

1. The Instagram rollout – MAUs crossing the 400 million mark
2. Continued video adoption and new targeting and analytics
3. The “Buy Button” ecommerce
4. New ad units - DPA and Lead Ads

Investors are also focused on the company’s expenses. Peck estimates expense growth above 45 percent in 2016, higher than the Street at around 36 percent.

In the report SunTrust noted, “We believe the Instagram rollout to FB's 2.5M advertisers could drive >$2B revenue lift by 2017. We began layering IG in our estimates previously and expect the street to have fully added IG after this quarter. We believe the monetization will grow at a measured pace.”

The revenue estimates for 2016 and 2017 have been raised form $23.6 billion to $23.8 billion and from $30.6 billion to $31.6 billion, respectively. The EPS estimate for 2016 and 2017 have been reduced from $2.75 to $2.73 and from $3.66 to $3.63, respectively, to reflect higher investment spending.