Facebook, Inc. Earnings: Can Social Media Keep Soaring?

Facebook (META -10.56%) will release its quarterly report on Wednesday, and investors have high expectations that the social media giant will be able to sustain its recent explosive growth. Yet with the inevitable slowing of growth rates that comes from its already-impressive size, Facebook will increasingly face challenges from newly public Twitter (TWTR) and other social media start-ups as well as well-established tech giants Google (GOOGL -1.97%).

Facebook has finally gotten out of investors' penalty box, with a huge share-price advance that wiped out its losses following its disastrous 2012 IPO. Even though the company has successfully found ways to monetize its service, especially in the challenging mobile advertising front, Facebook still has plenty of skeptics who think that it's a phenomenon that might not be able to adapt to changing industry conditions. Let's take an early look at what's been happening with Facebook over the past quarter and what we're likely to see in its report.

Stats on Facebook

Source: Yahoo! Finance.

How well can Facebook earnings connect with investors?
In recent months, analysts have stayed optimistic about Facebook earnings, raising their fourth-quarter estimates by a nickel per share and their full-year 2014 projections by almost three times that amount. The stock has moved modestly higher, gaining 1% since late October after giving up more substantial gains in just the past few days.

Facebook's third-quarter earnings showed just how successful the social media giant has been in growing at an amazing pace. Sales soared 60%, with monthly active-user counts rising 18% year over year to 1.19 billion. Even more importantly for investors, average revenue per user rose 33% from the year-ago quarter to $1.72, demonstrating its greater ability to monetize its service effectively. Mobile ad revenue fell just short of the 50% mark, further showing Facebook's enviable track record at getting greater exposure to the mobile space.

The big question for Facebook is how it can sustain its huge growth. Moves like magazine-style ads on its Instagram service could help Facebook add to its overall advertising revenue, and in light of some concerns about Facebook's falling popularity among teen users, diversifying by making greater use of Instagram could prove to be a smart strategic move to capture a wider swath of its potential audience.

But many investors have long-term fears about Facebook's ability to stay relevant to social media users. One study from researchers at Princeton suggests that Facebook could see an 80% plunge in its audience over the next three years, using analogies with epidemiology and comparisons with MySpace in predicting the beginning of an abandonment phase that could destroy the company as investors know it. Facebook lampooned the researchers' methodology, giving its own tongue-in-cheek rationale for why Princeton will have no students by 2021. But even a less catastrophic drop in Facebook's importance in the social media world could cause problems for the high-valuation stock.

Moreover, rivals haven't found a way to supplant Facebook yet. Google has hoped that its YouTube subsidiary would be able to make it a leader in getting revenue from video ads. Yet Facebook has tested video ads on its own users' feeds, and the key advantage Facebook has is being able to target ads based on the information that users have given the company. Twitter's attempts to synchronize tweet-based ads with TV ads could boost its prospects, but Twitter has a long way to go before it can catch up to Facebook's social media head start.

In the Facebook earnings report, watch closely to see which direction the company picks for maximum growth. With investors breathing a sigh of relief that the stock has performed so well, Facebook has a window of opportunity to make game-changing strategic moves to preserve its edge against Google, Twitter, and other rivals in social media.

Click here to add Facebook to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.