| SAN FRANCISCO
SAN FRANCISCO Oct 27 Facebook Inc
finally earned Wall Street's love in the second quarter. Now it
needs to make the relationship last.
Its shares have doubled in just the last three months,
buoyed by an increasing belief among investors that Facebook has
finally struck a winning formula in mobile advertising.
But expectations will be high when the world's No. 1 online
social network reports third-quarter results on Wednesday,
meaning the world's largest social network will have to handily
beat Wall Street targets to maintain its lofty trajectory.
"They've got to prove to investors that they can continue
with the growth they demonstrated from the last quarter," said
Bob Bacarella, portfolio manager of the Monetta Fund, which owns
Facebook shares. "From the way the stock is priced today, the
expectations are generally that they will beat or exceed numbers
Revenue from mobile advertising will be the center of
Wall Street analysts expect Facebook to grow its mobile
revenue at least five-fold from the year-ago period, with many
"official" estimates ranging between $760 million and $840
million. But there are signs that investors are privately hoping
for an even bigger number.
"What I've been telling folks is that, in general, $850
million-plus is the number that's needed, maybe even $900
million-plus," said Ben Schachter, an analyst with Macquarie
Research, whose own estimate calls for $836 million in mobile ad
Facebook has regained Wall Street's confidence since a rocky
IPO that left its shares languishing under their offering price
for more than a year.
Shares of Facebook, which trade at 52 times adjusted forward
earnings, finished Friday's regular session at $51.95, up 96
percent over the last three months.
Along with Google Inc, which reported strong
quarterly revenue growth earlier this month, and soon-to-IPO
Twitter, Facebook is now considered one of the Internet
companies best positioned to benefit from the shift to mobile
The "newsfeed" ads that Facebook has introduced over the
past year inject marketing messages straight into a user's
stream of news and content. They are ideally suited for the
smaller screens of smartphones, which consumers increasingly use
to access the Web.
"Facebook has done itself quite a good turn by listening to
investors and giving them what they're looking for, which is
increasing mobile ad revenue," said Wedbush Securities analyst
ROOM TO RUN
Facebook weekly options, expiring on Nov. 1, on Friday were
implying about a 13.7 percent move for the shares in either
direction, said Steve Place, a founder of options analytics firm
investingwithoptions, in Austin, Texas.
The average move for Facebook shares the day after reporting
earnings is 8.36 percent over the five earnings periods since it
began trading as a public company in May 2012, according to
Birinyi Associates in Westport, Conn.
While the stock's recent run means it will be vulnerable to
a pullback on any whiff of disappointing news, some investors
and analysts say they believe the stock still has room to run as
new money-making initiatives kick-in.
Analysts on average expect Facebook to report adjusted
earnings per share of 18 cents, on revenue of $1.91 billion in
the third quarter, according to Thomson Reuters I/B/E/S.
Besides mobile ad revenue, investors will be keen to hear
management provide details about other money-making initiatives,
particularly video ads, and new ads that the company is rolling
out to monetize its popular Instagram photo-sharing service.
Big brands including Adidas, Lexus and Levi's will begin
running ads on Instagram in coming weeks, Facebook has said.
RBC Capital Markets analyst Mark Mahaney estimated in a
recent note to investors that Instagram could "monetize users at
a rate of roughly one-third that of Facebook."
That means Instagram could generate roughly $1.7 billion in
revenue in 2015, accounting for 13 percent of Facebook's total
revenue, Mahaney wrote.
Improvements in Facebook's existing ad business, including
developing better techniques for targeting ads at different
groups of its 1.15 billion users, could also boost revenue, said
Steve Weinstein, an analyst at ITG Investment Research.
"Even small improvements in ad click-through rates can be a
material driver to their business," said Weinstein. "I don't
think they need to jam a lot more ads into the experience, as
much as they need to continue to deliver more relevant ads."