Facebook Earnings Preview: Here’s What Will Drive Reactions

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Facebook (NASDAQ:FB) will report Q4:12 (ending December) results after market close on Wednesday, January 30, and host a conference call at 2pm PT (dial-in: 866- 554-3009, conf. ID:  85750523, webcast: http://investor.fb.com/results.cfm).

We expect solid Q4 revenues from a slew of new products, mobile growth, and increasing user engagement. We estimate Q4 revenue of $1.52 billion, inline with consensus, and EPS of $0.14, compared to consensus of $0.15. The company did not provide guidance. We believe that EPS upside will be driven by Custom Audiences, Facebook Exchange, Gifts, and Sponsored Stories, among other products. Results should reflect management’s commitment to sustained revenue and profit growth, while improving the user and marketer experience.

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We expect strong mobile usage and monetization growth to continue. In Q3, mobile MAUs reached 604 million, up 61% y-o-y, or 60% of total MAUs. Mobile users are more active than their desktop peers, with mobile users 30% more likely to use Facebook on a given day. In Q3, 14% of ad revenue (≈ $150 million) was from mobile, a percentage that should meaningfully increase in Q4.

We expect…

an accelerating revenue mix shift to Advertising from Payments, due, in part, to amendments to the Zynga (NASDAQ:ZNGA) contract. In our view, the 70%/30% revenue split between Zynga and Facebook will remain in place for social games on Zynga’s site where Zynga accesses the Facebook social graph, but Zynga will be allowed to keep 100% of revenues if it does not use the social graph. We estimate less than 10% of Zynga revenue is derived from Zynga.com.

We believe Facebook has only just begun to tap its Curated Search and Targeted Ad revenue potential.  Earlier this month, Facebook unveiled Graph Search, a curated search tool that allows users to access information from Facebook’s Social Graph that gives them more relevant search results. We estimate that Curated Search represents a $3 – 4 billion revenue opportunity by 2015, with Targeted Ads potentially contributing another $3 – 4 billion long-term.

Maintaining our OUTPERFORM rating and our price target of $35. Our price target reflects a value of $60 per MAU at Facebook’s peak MAU level with a conservative monetization assumption of $1 per MAU per month for five years.

Michael Pachter is an analyst at Wedbush Securities. 

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