Will Product Innovation Win it for Facebook?

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

Facebook (NASDAQ:FB) will report Q1:13 (ending March) results after market close on Wednesday, May 1, and host a conference call at 2pm PT (dial-in: 866-554-3009, conf. ID: 29615930, webcast: http://investor.fb.com/results.cfm).

We expect Q1 results at or above consensus. Our current estimates are for revenue of $1.43 billion and EPS of $0.10, compared to consensus of $1.44 billion and $0.12, respectively. The company did not provide guidance. We expect top-line growth to be driven by mobile ad revenue (up 100 percent q-o-q to over $300 million in Q4:12) and a slew of targeted ad initiatives, including Custom Audiences and Facebook Exchange.

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After launching last September, Facebook Exchange served nearly 1 billion impressions from over 1,300 advertisers per day by December. EPS growth will likely be driven by operating expense below the levels implied by management.

We do not expect management to provide additional FY:13 guidance. On its Q4:12 results call, management cautioned investors to expect opex to increase by ≈ 50 percent in FY:13. We have modeled slightly below this level, as we believe the company has more control over expenses than revenues. By providing such high-level guidance, the management provides itself with the flexibility to still deliver a positive earnings result through opex control even if revenue lags expectations.

We expect Home to drive engagement and top-line growth. Facebook recently introduced Home, a family of apps for Google (NASDAQ:GOOG) Android that essentially turns a phone into a Facebook phone with Cover Feed (apps, messages, and the last app used) and Chat Heads (a round icon for each message or SMS). We expect Home to appeal to high-volume users, with the potential for significant ad revenue from ads served in the Cover Feed (with users theoretically required to focus on, then swipe through ads) and search (with Graph Search replacing the customary Google search bar).

Product innovation continues. Since the start of the year, Facebook has introduced Home, Graph Search, and changes to News Feed, among other items, each apparently intended to drive advertising revenue. We believe that Facebook is only beginning to fully realize this opportunity, particularly on mobile devices.

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Initiating our FY:14 estimates for revenue of $8.50 billion and EPS of $0.81.

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.