April 23, 2014

Facebook Earnings Preview: Reassurance Required After M&A Heavy Quarter

By Jayson Derrick

Facebook will report its first quarter results on Wednesday after market close. The social media giant is expected to earn $0.24 per share on revenue of $2.34 billion.

Facebook last reported its quarterly results on January 29, in which the company earned $0.31 per share and beating the consensus estimate of $0.27. Revenue of $2.58 billion also beat the consensus estimate by $250 million as Facebook's mobile ad sales surged 41 percent quarter over quarter to $1.24 billion.

Facebook's first quarter earnings earned the praise of many Sell-side analysts prompting analysts at Susquehanna to lift his price target to $72, while analysts at Jefferies boosted the price target to $80.

On February 19, Facebook acquired mobile messaging service WhatsApp for a staggering $16 billion in cash and stock as what investors reasonably assumed to be part of CEO Mark Zuckerberg's longer-term vision of the company.

On March 7, Instagram struck its first major advertising agency deal to realize the full monetization potential of the photo sharing service (which topped 200 million monthly average users in the quarter) that Facebook bought for $1 billion in 2012.

On March 13, OTR Global reported that Facebook's news feed and FBX Exchange ad spend growth has moderated in the quarter due to rising prices. Coincidentally enough, on the same day, Facebook announced that its video ads are set to go live.

Related: Apple Earnings Preview: Will iPhone Sales Disappoint Investors?

Facebook's second sizable acquisition in the quarter occurred on March 25 when the company announced it had purchased Oculus VR, a developer of a virtual reality headset in a $2.3 billion deal.

With Facebook's multi-billion dollar M&A spend in the quarter and recent question marks from OTR Global, analysts and investors will be paying extra close attention to management's comments during the second quarter conference call.

Morgan Stanley: Follow the trend

Jordan Monahan, analyst at Morgan Stanley expects Facebook's trend of positive growth to continue into the quarter.

Monahan is projecting Facebook to report 1.263 billion global monthly average users, a 14 percent rise from a year ago. Of these 1.263 billion users, 203 million of them are from North America.

Monahan is projecting Facebook's advertising revenue to rise 76 percent year-over-year to $2.2 billion, but mobile revenue of $1.2 billion could represent a decrease of 1.5 percent from the previous quarter. Nevertheless, mobile advertising should represent 56 percent of total advertising, up from 53 percent in the previous quarter and 30 percent in the same quarter a year ago.

There are many catalysts ahead for Facebook including average platform eCPM (clicks per thousand) which could be stronger in the quarter. Monahan noted that if various reports were true that Facebook's ad pricing were flat quarter-over-quarter, he sees the potential for “meaningful” revenue upside.

Looking further down the road, Facebook will benefit from other catalysts including video advertising, which is a multi-billion dollar opportunity, according to Monahan. Additionally, Instagram's growing user base could contribute $2 billion of incremental revenue, although not before 2020.

Monahan is projecting Facebook to earn $0.26 per share on revenue of $2.422 billion in the first quarter.

Pivotal: Growth trajectory is clear

Brian Wieser, analyst at Pivotal Research Group upgraded Facebook to Buy from Hold on April 10 due to recent M&A activity and a pullback in many “high momentum” Internet names during the recent bear run.

“As a core theme coming in to 1Q14, we think there should be a significant degree of focus on how Facebook has continually demonstrated a strong capacity to look for new ways to monetize its inventory,” Wieser wrote. “Recent announcements reinforce our view that the company's growth can sustain itself for an extended period, even at the company's current size.”

Wieser is most bullish over Facebook expanding its market opportunity with new business lines which “will drive results essentially independently of consumer trends.”

Wieser is expecting Facebook's ad revenue growth to exceed 50 percent each quarter this year until the fourth quarter, as new ad products for new segments of marketers will contribute to Facebook's revenue stream.

One new segment in which Facebook will begin seeing a revenue stream is from Instagram, which Facebook is only beginning now to monetize. Additionally, Facebook recently expanded its initiatives for small businesses to promote a better advertising capability.

Wieser is projecting Facebook to earn $0.17 per share on revenue of $2.301 billion in the first quarter.

Shares are Buy rated with a $72 price target.

Topeka: Don't forget about China

In a quick note to clients on April 14, Victor Anthony of Topeka Capital Markets speculated that it is a matter of when, not if, Facebook enters the Chinese market.

“As such, we are adding entry into China, the world's largest Internet market, as a long-term catalyst for Facebook,” Anthony argued. “That is in addition to the near-term catalysts of Instagram monetization and video ads, and the longer-term catalysts of monetization of Graph Search and WhatsApp.”


Media Contact: 
Conan Li 914-460-4091 Conan.Li@otrglobal.com