Facebook Inc.(FB) is set to release its fiscal third quarter 2012 results after the closing bell on October 23, 2012.
Prior Quarter Recap
In the second quarter, Facebook’s revenue jumped 32.3% year over year to $1.18 billion, which was primarily driven by strong advertising revenue. Reported revenue was also ahead of the Zacks Consensus Estimate of $1.15 billion.
However, owing to the increased costs and higher-than-expected operating expenses, Facebook lost 8 cents per share (including stock-based compensation, payroll taxes and income tax adjustment,) compared with earnings of 11 cents per share in the year-ago quarter. Moreover, the loss per share was significantly wider than the Zacks Consensus Estimate of earnings of 9 cents per share.
For the forthcoming quarter, Facebook expects operating expenses to increase at a much faster rate compared to the second quarter. The company expects steep rise in research & development expenses mainly due to continued investments in product development for mobile segment and infrastructure.
For further details please read: Decent 2Q for Facebook
Estimate Revision Trend
In the last 30 days, only one out of the 16 analysts covering the stock revised estimates downward for the third quarter. The Zacks Consensus Estimate for the quarter remained at 7 cents per share.
Analysts covering the stock remain cautious about Facebook’s mobile monetization initiatives. The analysts expect revenue from mobile to be a long-term positive catalyst. However, analysts expect revenues from the segment to restrict the top-line expansion in the near term. Analysts also expect margins to be under pressure due to the rising investments. However, with a huge user base, Facebook is set to benefit in the long term.
Recommendation
We believe that Facebook has significant growth opportunities from increasing online advertising spending as compared to traditional formats. Facebook’s massive user base and its ability to track personal details over time make it a formidable force in the online ad market. Facebook can use this massive database to help advertisers target relevant ads going forward.
However, Facebook is facing significant competition in the display advertising market from Google Inc. (GOOG). Rising concerns over the effectiveness of Facebook ads as compared to Google’s AdSense have been a headwind lately. Apart from increasing competition, lack of visibility around mobile monetization remains a concern. Moreover, continued investments to expand mobile offerings are expected to hurt margins in the near term.
We remain Neutral over the long term (6-12 months). Currently, Facebook has a Zacks #3 Rank, which implies a Hold rating in the near term.
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