As Instagram ad load scales, and following our checks with digital marketing firms, we raise our estimates ahead of Facebook 4Q earnings on January 27. Discussions with ad buyers suggest modest acceleration in YoY 4Q15 core-Facebook U.S. advertising growth, and also suggest Instagram delivering a material revenue contribution. Moving past 4Q, investor focus likely centers on 2016 opex guidance and Oculus. While expense guidance could come in above expectations, associated upside to revenue leaves us confident in our 2016E EPS forecast of $2.85. We raise our 4Q and 2016 estimates due to expected strength in Instagram ($315mn in 4QE/$1.75bn in 16E) and the incorporation of Oculus into our model (~$370mn revenue in 16E). Our Buy Rating and $120 target price remain unchanged.

*Checks with digital marketing firms indicate YoY revenue growth accelerating vs. 3Q15. During our 4Q Ad Trends Call, MEC Global highlighted that it is seeing FB ad spend growth of 55% YoY, above its 3Q reading and indicating general acceleration. We model ad revenue growth of 45% YoY to $5.22bn, in line with consensus. FX headwinds should continue to be a headwind to international revenue growth, but we expect no deceleration on an FX-neutral basis. We estimate daily active users (DAUs) growing by 32mn QoQ to 1.04bn. Engagement should hold steady QoQ as defined by DAUs/MAUs at ~65%.

*Instagram contribution and Oculus driving upside to estimates? 4Q marks the first quarter that Instagram ad inventory was available to Facebook's 2mn+ advertisers via its API. Our check with MEC suggested that among its clients, 4Q Instagram ad spend was up materially relative to 3Q's small base. The release of Oculus Rift at the end of 1Q16 provides a further tailwind to 2016 results, albeit with a narrower margin profile than FB's ad-based businesses. We model Oculus revenue of $370mn in 2016E on 550k unit shipments (~4% penetration of the high-end gaming PC market).

*FY16 operating margin guidance a key area of focus. We expect management to provide opex growth guidance for FY16 on 4Q's earnings call. Should YoY opex growth guidance come in above our +41% estimate, investors may look through this due to the launch of Oculus Rift, and lower margin contribution from associated hardware sales.

*Valuation increasingly attractive. At 13x 2017E EV/EBITDA and ~25x 2017E P/E, FB's valuation is approaching a two-year low, as clear growth catalysts are set to deliver a material contribution to consolidated results.

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