Facebook Earnings Preview: Watch Mobile Ad Revenue And Expense Growth

| About: Facebook (FB)

Facebook (NASDAQ:FB) reports its first quarter 2013 after the bell on Wednesday, May 1, with analyst consensus (according to ThomsonReuters) expecting earnings per share (EPS) of $0.13 on $1.439 billion of revenues, for expected year-over-year growth of 30% and 36%, respectively.

We are long the stock for clients, and continue to think it will eventually trade above its IPO-tainted $40 per share, although it might take some time.

There are two big themes at work for both the near and longer term:

1.) 2013 will be an "investment" year for FB, as it does much the same thing as Amazon did, by stepping up expense growth markedly and stepping all over EPS growth, which is already in the numbers, as you will soon see.

2.) Mobile Ad revenue seems to be the focus of the analysts as they typically obsess over one thing or another, and with FB currently, the analyst focus is on the mobile ad revenue estimate.

1.) Investment Year

EPS growth rates - estimates and actual

12/31 9/30 6/30
2015 (est) 33% 25%
2014 (est) 39% 30% 31%
2013 (est) 8% 23% 29%
2012-actual 23% 21% 12%
Click to enlarge

Facebook's EPS estimate Trends - last 4 quarters

12/31 9/30 6/30 3/31/12
2015 $1.05 $1.04
2014 $0.79 $0.83 $0.81
2013 $0.57 $0.64 $0.62
2012 $0.53 $0.52 $0.48 $.048
Click to enlarge

Source: ThomsonReuters data, internal spreadsheet

As the reader can quickly see, 2013's EPS estimate growth fell to 8% after 4th quarter financial results were reported, where expense growth rose 67%, on headcount and "infrastructure spend."

Frankly, as long as revenue growth doesn't slow, I think FB will pass this "investment hurdle" and start to grow EPS again, as 2014 and 2015 estimates indicate in the above graph.

2.) Mobile Ad revenue growth

FB's shares were trading below $20 in August-September 2012 when Mark Zuckerberg took the stage at one of the closely-watched industry shows and talked about FB's mobile ad strategy, which promptly put a floor under the stock.

Here is one analyst's expectation of FB's mobile ad revenues over the next 4 quarters and the expected year-over-year growth:

FB's Mobile Ad revenue

q4 '13 (est) $428 40% (y/y)
q3 '13 (est) $405 166% (y/y)
q2 '13 (est) $383

6% seq

q1 '13 (est) $360 18% seq
q4 '12 $306 100% seq
q3 '12 $152
Click to enlarge

As a percentage of revenues, mobile is expected to grow from 12% and 19% in the last two quarters of 2012, to 25% in q1 '13.

Mobile is the key for now, although I'm sure that will change.


FB's valuation looks pretty scary, trading at 54(x) expected 2013 earnings for just 8% earnings growth on 31% revenue growth. Using most traditional valuation metrics, the stock looks unappealing, which is often the case with early-stage growth companies.

Our internal model puts a fair value on FB of $65 per share, versus Morningstar's fair value estimate of $32, so splitting the difference, if we use an intrinsic value of $50 for FB, the stock is still trading at a discount of almost 50% to that fair value.

The other reason we are bullish is that sentiment seems to have turned materially on FB, as the stock is scraping its 200-day moving average.

This is a higher-risk name, selling at a lower-risk entry point. We won't add more prior to the earnings report, but have been accumulating shares between $25-$28 the last few months.

Disclosure: I am long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.