Updated to include comments from Jim Cramer.
NEW YORK (TheStreet) -- Facebook (FB) - Get Report reports earnings next Wednesday. Expect a strong quarter driven by mobile, video and increasing monetization of Instagram. Investors are really looking forward to the second half of the year to drive the stock.
I expect a strong second quarter for Facebook, but investors will be looking toward the second half of the year. Comparisons get easier in the third and fourth quarter. When that kind of thing happens, investors get excited, big headlines are generated and the stock moves higher.
Last year, Facebook posted very strong revenue growth. For example, in the first quarter, revenue grew 82% to $2.265 billion. This year, the first quarter grew 55%. (Not such a great comparison!) The company should easily beat the second-quarter consensus forecast of $3.98 billion. If I'm right, analysts will have to scramble to raise the third and fourth quarter estimates.
I think the back half estimates are too low because Instagram's ad platform is just beginning its monetization efforts. Over 70 million photos a day are shared on Instagram. Those photos generate over 2.5 billion likes. Users spend 20 minutes per day on Instagram, which is estimated to be a $4 billion a year opportunity. The company will open the platform up to advertisers in July. That revenue would flow into the back half of the year.
"We own Facebook for ActionAlerts because we think it represents a multi-year play on user-generated content, social media and advertising that is in the early innings," said TheStreet's Jim Cramer, Portfolio Manager of the Action Alerts PLUS Charitable Trust Portfolio. "We aren't particularly focused on this current quarter and are cognizant of the run-up and how hard that makes it for a stock to go ever higher. But it is an excellent, well-run company that's built to last.
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Analysts think Instagram will generate over $100 million in ad revenue this year and could grow to a $1 billion by 2017.
For the year, total revenue should increase 37% to $17 billion.
Facebook is a cash machine. The gross margin of 82% produces an operating margin of 53% or $8.8 billion. Those huge margins turn into earnings per share of $2 for fiscal 2015. With an additional 34% revenue growth next year, earnings should increase 32% to $2.65.
Investors who think Facebook is a fad or can't understand how "likes" turn into money should watch the documentary Generation Like from Frontline.
I don't think it's very difficult for Facebook to get to $105 or $110. That would only be a 30x to 35x multiple on the stock. That's only 1x or 1.5x Facebook's growth rate, which isn't very expensive for a company with this kind of growth profile.
Back half estimates seem low. Comparisons get easier. Instagram will open to advertisers in July. Unlike Google (GOOG) - Get Report (GOOGL) - Get Report, Facebook has good expense management, which allows it to drop revenue straight to the bottom line.
This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.