Facebook, Inc. Earnings: Another Monstrous Quarter?

Having beat analyst top-line estimates for six quarters in a row, investors are getting used to quite a show every time Facebook (NASDAQ: FB  ) reports quarterly results. Can investors expect similar excitement from Facebook tomorrow after market close when it releases its first-quarter figures? The answer is more likely than not.

From uncertainty to mobile domination
Going public with zero dollars of mobile ad revenue and a very large and growing mobile user base, Facebook stock initially faced skepticism from the Street: Could Facebook meaningfully monetize mobile? The skepticism sparked a sell-off that sent shares below $20.

But Facebook proved everyone wrong. Not only did the company monetize mobile, it monetized mobile better than anyone expected. At the close of last quarter, mobile ad revenue accounted for more than half of Facebook's total ad revenue. To illustrate just how impressive this gain is, consider the year-over-year changes in Facebook's most recent quarter: Despite total ad revenue growing 76%, mobile ad revenue as a percentage of total ad revenue grew from 23% in the year-ago quarter to 53% today. Of course the stock has followed suit. Shares now trade at about $63.

But can Facebook keep up this impressive transition to mobile for another quarter?

Analyst estimates
Based on the consensus analyst estimates for Facebook's first-quarter results, it looks like the company is set to report yet another monstrous year-over-year gain. Analysts expect revenue of $2.36 billion, up 62% from the year-ago quarter. While that figure comes in below Facebook's Q4 year-over-year top-line growth of 63%, Facebook has delivered upside surprises on revenue every quarter for a year and a half. Analysts expect EPS of $0.24, up from $0.12 last year.

Thanks to two near-term revenue levers, there's a good chance analysts expectations will play out handsomely.

First, Facebook's mobile momentum is driving accelerating growth rates in the company's ad revenue, which accounts for 90% of Facebook's total revenue. Just take a look at this chart tracking Facebook's year-over-year growth rates in ad revenue.

Data for chart retrieved from SEC filings for quarters shown.

Given the momentum of big marketers shifting their ad spending budgets toward Facebook to capitalize on the mobile opportunity, it's likely that year-over-year ad revenue growth rates could accelerate in Q1 yet again.

The other lever? Higher pricing for mobile ads. Goldman Sachs' analyst Heather Bellini, who has a bullish $78 price target on Facebook stock, sees upside in Q1 thanks to favorable gains in ad pricing. Bellini's "field checks" pointed to year-over-year growth in ad pricing; this is surprising since she originally predicted a decline. Further, she also saw marketers' Facebook ad budgets expanding.

Bellini's observations make sense. After all, Facebook implemented efforts during the last month of the quarter to strengthen ad quality. Such a move not only would suggest Facebook is confident in the quarter's level of ad revenue, but it would also likely lead to higher pricing for ad products.

What should investors do heading into the earnings? While it's definitely likely that Facebook could surprise the Street, it's less certain what the market's reaction will be to the results. With such robust forward-looking assumptions priced into this hot growth stock, beating estimates is basically a prerequisite for Facebook in order to keep the Street happy. Given this risk, investors may be better off waiting to get a pulse check on Facebook's business by analyzing tomorrow's figures and management comments before they consider buying the stock. Predicting which way the stock will go after earnings tomorrow is a fool's errand -- fool with a lowercase "f."

What should current Facebook shareholders do? As long as there are no red flags when Facebook reports results, the best move would likely be to continue holding onto the business for the long haul. For the most part, Zuckerberg and Co. are firing on all cylinders.

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