Facebook Earnings Anxiety: Pre-Release Insights for Shareholders

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

Facebook (NASDAQ:FB) will report Q3:12 (ending September) results after market close on Tuesday, October 23, and host a conference call at 2pm PT (dial-in: 866-554-3009, conf. ID: 30503033, webcast: http://investor.fb.com/results.cfm).

We are revising our estimates to reflect mix shift (to Advertising from Payments due to changes to the product slate and Zynga’s struggles) and slightly lower expenses.  Increasing our revenue estimate to $1.26 billion from $1.23 billion and our EPS estimate to $0.10 from $0.09, vs. consensus of $1.23 billion and $0.11. Facebook did not provide financial guidance. Several new or modified products are expected to positively impact revenue growth including Custom Audiences, Facebook Exchange, Sponsored Stories in mobile News Feeds, and others (key recent developments are on pages 2 – 3 of this note).

Multiple lock-up events are likely to negatively impact share prices due to oversupply. We recommend that investors consider trimming or liquidating their stakes ahead of these dates, or wait until they pass before accumulating shares.

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Payments revenue likely to be hurt by Zynga’s (NASDAQ:ZNGA) recent woes.  On October 4, Zynga, which has generated the majority of Facebook’s Payments revenue historically, negatively pre-announced Q3 results, citing weakness in certain games within its Ville-style category. Zynga lowered FY:12 guidance once  again. In our view, a slew of recent Zynga releases hurt monetization of its previously evergreen franchises as users spent more of their time on new games but less of their money.  There is some potential for payments gains from other game vendors.

We expect the Facebook products listed above to positively impact future periods as well. As a result, we are raising our FY:12 estimates for revenue to $4.96 billion from $4.91 billion and for EPS to $0.43 from $0.41. We are also raising our FY:13 revenue estimate to $6.07 billion from $6.02 billion. Long-term, we believe Facebook could generate $3- 4 billion in Targeted Ad revenue by 2015. A large Curated Search opportunity also exists, but Facebook appears more focused on other areas of the business at present.

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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