Beijing time, October 28th morning news, Facebook will release its third-quarter earnings report after the US market closes on Wednesday (early Thursday Beijing time). The second quarter earnings report published by Facebook was welcomed by Wall Street, and currently the company needs to continue maintaining a good relationship with investors.
Mobile Ads as the Focus
In the past three months, Facebook's stock price has doubled. Investors generally expect that Facebook will succeed in the mobile advertising sector. However, investor expectations for Facebook are extremely high at present, meaning that Facebookâs third-quarter earnings report must exceed Wall Street's expectations to continue the current stock price trend.
Bob Bacarella, investment manager of Monetta Fund who holds Facebook shares, said: "They need to prove to investors that they can maintain the growth momentum since the last quarter. Based on the current stock price, the market expects Facebook's third-quarter performance to far exceed expectations."
In the third quarter, revenue from mobile ads will be the focus of Facebook's performance. Wall Street expects that Facebook's mobile business revenue in the third quarter will reach at least five times that of the same period last year, with many "official" estimates ranging from $760 million to $840 million. However, some signs indicate that investors hope Facebook's performance will be better than this expectation.
Macquarie analyst Ben Schachter said: "I would point out that generally speaking, revenue exceeding $850 million is necessary, and it might even need to exceed $900 million." Macquarie currently estimates that Facebook's third-quarter mobile ad revenue will be $836 million.
Huge Stock Price Increase
After the IPO last year, Facebook's stock price plummeted and only recently regained Wall Street's confidence. As of the close of the U.S. market last Friday, Facebook's stock price was $51.95, with a 96% increase in the past three months. Facebook's adjusted forward P/E ratio has reached 52 times.
Earlier this month, Google reported strong quarterly results. Similar to Google and Twitter which is about to go public, Facebook is considered to have one of the best development opportunities as the internet industry shifts to mobile platforms. In the past year, Facebook has strongly promoted "dynamic aggregation" ads. These ads are directly integrated into users' messages and content streams, making them very suitable for smartphone small screens, as more and more users access the Internet via smartphones.
Wedbush Securities analyst Michael Pachter said: "By listening to the voices of investors and providing them with the performance they want, namely mobile ad revenue, Facebook has successfully turned around."
According to Steve Place, founder of options analysis company Investingwithoptions, the trading price of Facebook's weekly options expiring on November 1st indicates that Facebook's stock price volatility will be approximately 13.7%. According to data from market research company Birinyi Associates, the average stock price volatility after Facebook released its earnings reports in the five quarters following its IPO was 8.36%.
Potential for Further Growth
The recent trend in Facebook's stock price suggests that any disappointing news could lead to a significant pullback. However, some investors and analysts believe that with the implementation of new commercialization initiatives, Facebook's stock price still has room to grow.
According to statistics from Thomson Reuters, analysts currently estimate on average that Facebook's third-quarter revenue will be $1.91 billion, with adjusted earnings per share of 18 cents. In addition to mobile ad revenue, investors also hope that Facebook management will provide details on new commercialization initiatives, especially video ads and the progress of Instagram's commercialization.
Facebook previously stated that major brands such as Adidas, Lexus, and Levi's will launch advertising campaigns on Instagram in the coming weeks. Mark Mahaney, an analyst at RBC Capital Markets, estimated in a recent report that Instagram's commercialization pace will be about one-third of Facebook's. This means that by 2015, Instagram's revenue will be approximately $1.7 billion, accounting for 13% of Facebook's total revenue.
Steve Weinstein, an analyst at ITG Investment Research, said that strengthening the current advertising business, such as developing better technologies to target ad audiences, will also help boost Facebook's revenue. He said: "Even a slight improvement in ad click-through rates will become an important driver of Facebook's business development. I don't think they need to add more ads to the user experience compared to improving ad relevance."