Facebook: Q3 results could be a perception changer

Right now, analysts following Facebook are a little bewildered. Although they are all poring over the same publicly-available shareholder material, there is certainly not a homogenous perception of what Facebook's business model is and what this brings to the table in terms of both revenue and earnings.

Analyst expectations for Facebook are all over the place, as Chart 3 below illustrates.  That means that Facebook's Q3 results - due October 25 - could be a perception changer.

So far in 2012, there have been only small grinding changes to analysts' overall EPS estimates for Facebook. But if the Q3 news is fundamentally bad - for example, if mobile revenues are not picking up - then investors should expect sharp drops in what have until now been sticky earnings expectations.

On top of this uncertainty we have a substantial amount of Facebook shares set to be unlocked.  This will in itself put some pressure on the share price, so all in all the risks are still high.

What is in the cards right now?
At the moment analysts are expecting earnings in 2013 and 2014 to rise 28.5% and 30% respectively, see chart 1. This corresponds to forward P/E’s of 29.1 times and 20.5 times respectively. These levels are much more attractive than the levels we saw at the IPO.

What I am afraid of is a landslide change to the overall analyst expectations. For now the expectations are high, and large growth in 2013 and 2014 will be necessary to fulfill the targets. The forward looking P/E’s only hold if there are no changes to earnings expectations! This is exactly the risk investors should be aware of – if analysts earnings projections are lowered, then P/E increases and Facebook might look expensive again even though its stock price has fallen.

Target price
The average consensus target price has declined since the IPO from USD40.6 to USD33.3, see chart 2. This is much less than the real price decline, and reflects the overall consistency between the analysts' earnings and the target price estimations – they have both moved incrementally lower.

Investors should expect target prices to be slashed in the same manner as earnings expectations, if Q3 does disappoint.

Since the IPO, analysts with the most negative view have come the closest to Facebook’s actual share price development. Just recently we have seen the “low” estimate decline from USD 20.3 to USD 15, reflecting an even larger spread between the negative and optimistic camp.

Analysts are still overall not really on top of things.
Looking at the expectations for Q3, there is still a huge disbursement of both revenues, earnings and on margins, see Chart 3. The signal I get from this is that analysts have still not really having grasped what Facebook is all about. I expect the Q3 results to create more clarity, and hopefully we will see a much more consistent picture going towards Q4.

Q3 is some time away
I don’t expect analysts to move their overall stance much up to the quarterly report release October 25. So investors need to position themselves to take into account the load of un-locked shares and the risk of negative surprises in the earnings report. 

All known information is in the share price – but do not misinterpret this. A stock price should be looked at as a row of probability weighted scenarios. When new information arrives then this can change the probabilities, and again change the price. Expect the volatility to remain high.

See my previous Facebook articles:

1. Questions you should ask before investing in Facebook
2. What is Facebook really worth
3. Hey Facebook we need more disclosure.
4. Facebook increasing user numbers..
5. Facebook IPO - Valuation pushed to the extreme
6. Facebook - even USD25 seems a stretch...
7. Apple - iOS6 and the implications for Google, Facebook...
8. Facebook - Relief rally but did the big picture really change
9. Facebook analysts agree on price disagree on revenue, net income.
10. The first flood of shares will be unlocked August 16th.
11. Facobook stock is cheaper now - and maybe even be worth buying.
12. Facebook - Opportunities risks and lots of volatility ahead