DEEP ANALYSIS: Facebook Revenues Didn’t Translate to This

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

Facebook (NASDAQ:FB): Q2 EPS beat from strong advertising revenue and better-than-expected tax rate. Total revenue was $1.18 billion, compared with our estimate of $1.11 billion and consensus of $1.15 billion. Advertising revenue was $992 million, compared with our estimate of $909 million, while Payments and other fees revenue was $192 million, compared with our estimate of $202 million. Non-GAAP EPS was $0.12, in line with our estimate and consensus.

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The revenue upside did not translate into earnings upside, as the company increased its costs in order to invest in future growth.  The investment is expected to continue for the balance of the year, pressuring operating margins.

Adjusting our estimates. We are increasing our FY:12 estimate for revenue to $4.91 billion from $4.75 billion to reflect better-than-expected advertising revenue in Q2, but lowering our EPS estimate to $0.41 from $0.50 to reflect higher levels of spending in the second half of the year, including on R&D and infrastructure.

Strong mobile growth. Recent mobile developments include implementing Sponsored Stories into mobile News Feeds, Facebook’s (NASDAQ:FB) new camera app, agreeing to acquire Instagram, and new releases of Messenger and Android apps.

Better-than-expected Q2 advertising revenue driven by multiple factors. Advertising revenue was up 28% in Q2, above our growth expectation of 17%, due to an 18% increase in the number of ads delivered,  and a 9% increase in the average price per ad. The number of ads increase was driven by user growth and changes that resulted in more ads per page. The increase in ad prices was driven by the ramp-up of Sponsored Stories in News Feeds on PCs and mobile devices.

Well-positioned to capture additional advertising market share. Facebook believes its ad growth potential is unique due to a number of factors, including: word-of-mouth among users, its emphasis on demand generation as opposed to demand fulfillment (from search), the continued roll-out of Sponsored Stories, the Facebook Ad Exchange, new methods to demonstrate the effectiveness of its ads, and its appeal to small and medium business owners.

Maintaining our OUTPERFORM rating, but lowering our price target to $35 from $44. Our revised 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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