We expect Facebook Inc. (FB) to beat earnings expectations when it reports third-quarter fiscal 2014 results on Oct 28. Last quarter, the company posted a 15.38% positive surprise. We note that Facebook has outperformed the Zacks Consensus Estimate in the preceding four quarters with an average positive surprise of 20.07%.
Why a Likely Positive Surprise?
Our proven model shows that Facebook is likely to beat earnings because it has the right combination of two key ingredients.
Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +6.25%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank #2 (Buy): The combination of Facebook’ Zacks Rank #2 and +6.25% ESP makes us confident of an earnings beat this quarter.
Note that stocks with Zacks Ranks #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement, especially when the company is witnessing negative estimate revisions.
What is Driving the Better-than-Expected Earnings?
We believe that Facebook’s growing mobile user base, Instagram’s increasing popularity and international expansions will boost its advertising revenues in the quarter. Moreover, we expect strong mobile revenue growth to be a key catalyst.
Facebook will also benefit from Facebook Audience Network (FAN), a mobile ad network that significantly expands its total addressable market (TAM).
Facebook’s focus on improving user engagement through frequent product updates and new features are the positives amid intensifying competition from Google (GOOGL) and Twitter. However, the aggressive acquisition policy can weigh on its balance sheet.
We note that both WhatsApp and Oculus are long-term growth opportunities. The Internet.org initiative is also long-term focused. Lack of revenues from these initiatives can put Facebook’s core business under significant pressure in the near term.
Other Stocks to Consider
Facebook is not the only firm looking up this earnings season. We also see a likely earnings beat coming from these three industry peers:
InvenSense (INVN), with an Earnings ESP of +10.00% and a Zacks Rank #2.
Web.com (WWWW), with an Earnings ESP of +1.92% and a Zacks Rank #2.
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