Facebook (FB) earnings later today: Will they disappoint?

• Facebook consensus Q3 earnings is USD 0.11 per share
• Analysts are still uncertain on the revenue and earnings potential
• Risks have risen with an earnings miss from Google
• More shares coming to market 29 October and 14 November.

Consensus development
The overall earnings picture has been relatively stable on the full 2012 year earnings, as seen in Chart 1. This in the light of new initiatives taken from Facebook /NASDAQ:FB), see further down, but analysts are not willing to bank on these revenue streams just yet. Full year 2013 and 2014 has continued to be under some pressure as the earnings model has been called into question.

The implicit earnings growth is in the range 25-29% the coming two years, which is a decline from expectations earlier this year, as the further years are taken down more. These are still high expectations and user growth is still strong, but revenue and earnings per user are still under pressure and it is this battle investors and analysts are uncertain about.

Consensus target price
Analysts “had” to hold their target price for some time after the May IPO, as they could become liable if they change too quickly.

Apparently they are in a more comfortable zone now, as the average target price has continued to drop since end of July. The target price is now close to USD 27.5, a reduction of around USD10.

From my chair it is a sign of higher risk premium demanded, as analysts now realize that this is actually an unproven business case. 

Expectations on Q3 tonight
As I have stated before, analysts have not yet really gotten a grip on what Facebook is all about. Chart 3 shows that analysts expect revenues to reach USD 1,150-1,300m, but this is not reflected in an upward sloping fit around a regression line. The marks are scattered all over and by looking at the labels containing the implicit margins shows a range from 2.7% to 31.1%. That is what I call a wide range!

The analysts expect an EPS level of USD 0.11 for the quarter. With the wide spread in expectations, there is definitely room for some volatility after the earnings – that would be aftermarket trading and Wednesday.

Opportunities
While we all are looking at the struggles Facebook is facing, there is a risk that we could fail appreciate the initiatives the company is taking to diversify the revenue streams and therefore to rely less on advertising.

Facebook have launched Paid Posts at a price of $7. Some of us might find this irrelevant and useless. But just think about users with many friends in their networks who want to make sure everyone sees an important post - perhaps a wedding announcement or a new baby. A promoted post would not be something you do every day, given the high price, but if an event is important enough you might use this service.

But set the USD 7 in perspective of the current yearly revenue per user of around USD 5. If let’s say 1 in 7 people use this service during a given year, then revenue per user would rise 20% to USD 6. On top of this notice this a service suited for both mobile and PC.

Facebook has also launched the “Custom Audience” feature which enables advertisers to address specific users . Advertisers match e-mails from CRM systems of which they have an interest in. These are matched with same user on Facebook. Instead of hoping to reach the right crowd then this is rifle shots. This will become a revenue driver in the longer run.

Risk
Short term I see a higher risk of disappointment than a sudden surprise of a functional mobile advertising model. Facebook has been scrambling for a while and the huge uptake of new users, remember they are already above the 1bn mark but many of the new I expect to be mobile only users.

With Google (NASDAQ:GOOG) in mind from last week, where revenues per click are under pressure does not really bode well for the earnings tonight.

Lastly we should take note of the fact that more shares are coming out into the market and this should be on Monday according the Facebook’s communication. The amount of shares un-locked will be 234m but we do not know if all of them going to hit the market. Time will tell, but I expect this to put some downward pressure in the price in the short term.

Lastly we will – unfortunately - see yet another and the biggest un-locking shares -  777m shares on 14 November. This will also keep the stock under pressure in the short term.

Conclusion
I would like to get this earnings report out of the way and then get the unlocked shares on the market. If this puts some pressure on the share I would really consider entering into my first long trade into the stock. But the size should take into account the risk of more pressure in mid-November.