The No 1 social networking company's second-quarter report on July 26 will be scrutinised by investors looking for clues on the health of its business, which is experiencing a sharp slowdown in revenue growth and mounting questions about its advertising sales.
With a rich multiple that gave Facebook the distinction of being the first US company to go public with a valuation of more than $100 billion, the company headed by 28-year-old Mark Zuckerberg has little room for error.
there are also plenty of reasons to believe that Facebook will impress the cynics next week. Let's dive right in.
1. The IPO drought has come and gone
An immediate reaction to Facebook's cascading debut was to slam the brakes on the IPO market. Prospective debutantes didn't even dare to go public in the wake of Facebook's belly-flop, and it was several weeks before any company had the gall to actually go public.
That was been just two months ago, but the market has returned to embracing dot-com IPOs. Kayak (NAS: KYAK) , the popular website that scours several travel websites and providers to aggregate rates on lodging and flights, went public on Friday.
There was no more Facebook fallout. Kayak's stock opened a hearty 14% higher than its IPO price.
2. The ads are adding up
Investors have been concerned about the effectiveness of Facebook ads -- in part because of GM's defection -- and the challenges of monetizing the mobile platform that is quickly become the way users engage with the site.
There was some encouraging news on both fronts earlier this week.
TBG Digital's Global Facebook Advertising Report Q2 2012 finds that advertisers are now paying 58% more per impression on Facebook than they were a year ago. That's a sharp contrast to Google (NAS: GOOG) , which reported this week that advertisers were paying 16% less for a lead on its website in its latest quarter.
Companies are paying more on Facebook because the website is getting better at targeting its ads. Its latest move, inserting in news feeds "sponsored" posts by companies that a Facebook friend already likes, has been a brilliant way to improve its desktop marketing effectiveness and introduce advertising in mobile. TBG Digital's study shows that click-through rates have moved 11% higher over the past year.
Between the higher ad rates and healthier click levels, Facebook's revenue and profitability should be growing dramatically faster than what may be a merely modest increase in page views.
3. You get only one chance to make a first impression
Facebook was reluctant to go public and Mark Zuckerberg isn't a fan of traditional rites of public companies, but the company knows how important this quarter will be.
Analysts see Facebook earning $0.12 a share when it reports on Thursday. The smart money has to be on a bottom-line beat.
Sure, Zuckerberg doesn't want to resort to managing earnings. The last thing he wants is to spoil investors into expecting quarterly miracles on the bottom line. However, Zuckerberg knows that this matters. A bad report will translate into a sluggish share price, and a busted IPO will make it that much harder to retain important employees and attract new ones.
There may very well be a quarter when Zuckerberg thumbs his nose at conventional expectations, but it won't happen now. Facebook won't miss at a time when its IPO has become a comedic punch line. There's a lot to prove, and for once Zuckerberg will live up to his role as a CEO of a public company.
A discounted share price and a strong report should help move Facebook higher in the week ahead.
Facebook profit estimates July 26 2012
Facebook Inc (Nasdaq: FB) is engaged in building products to create utility for users, developers, and advertisers. The company has a market capitalization of $62.58 billion. It is expected to report FY 2012 second-quarter EPS of 12 cents on revenue of $1.15 billion. Facebook is trading around $29.23 a share, 23 percent below its IPO price of $38.
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