Facebook (FB) Beats on Both Top and Bottom Lines as Mobile Ad Revenue Soars

Despite falling 49% since its ill-fated IPO in May, shares of social networking site Facebook (FB: Charts, News) surged back nearly 20% yesterday after the company posted strong third quarter earnings that topped analyst estimates.

Facebook's revenue rose 32% to $1.26 billion, topping the average of estimate of $1.23 billion. The company earned an adjusted profit of 12 cents per share - flat growth from the previous year - which excludes stock-based compensation and payroll taxes. Analysts had projected earnings of 11 cents per share on the same basis. Daily Chart
Facebook's strong ad revenue allayed concerns regarding the company's ability to consistently generate revenue from mobile advertising. Facebook had noted in the previous quarter that it was unable to monetize its mobile apps, which are widely used on Google (GOOG: Charts, News) Android and Apple (AAPL: Charts, News) iOS devices. Facebook's mobile ad revenue surprisingly rose from an anemic $10 million in the second quarter to a robust $150 million in the third quarter - making up 14% of the company's total advertising revenue. Analysts such as Sterne Agee & Leach's Arvind Bhatia had previously expected that the company would only generate only 5% of its total revenue from mobile ads. Since March, CEO Mark Zuckerberg has released over half a dozen new paid advertising initiatives on the website in an effort to attract more businesses looking to reach a broader audience on smartphones and tablets. These initiatives include its Sponsored Stories and Promoted Posts - interpreted through items their friends "Like" online - and streamlining them into a more focused advertising experience. Zuckerberg noted that while desktop and laptop based advertising still generate the majority of Facebook's revenue, a paradigm shift in which mobile ads will become more important may just be around the corner. Zuckerberg stated, "Most people underestimate how fundamentally good the trend toward mobile can be for Facebook." Approximately 60% of Facebook's user base of 1 billion members are currently accessing the website from mobile devices, up from 47% in the prior year quarter. Bhatia cautiously acknowledged Facebook's improvement, stating, "They still have a long way to go to prove that this is sustainable - they can keep going in this direction, but what it shows is that things can move relatively quickly." Facebook CFO David Ebersman noted that ad revenues continued to increase through the quarter despite a 7% increase in ad prices, which complemented a 27% increase in ads delivered. Despite these strong numbers, Facebook's share of mobile advertising in the United States remains slim, at 2.8%. It ranks sixth in the nation, trailing far behind market leader Google, which commands 52% of the mobile advertising market. In addition, Facebook's revenue from payments and micro transactions from virtual games increased 13%, topping expectations. Analysts had been concerned about Facebook's ability to grow its micro-payment business, after its longtime partner Zynga (ZNGA: Charts, News) posted weak earnings last quarter. Although Facebook shares have made a solid recovery from its all-time low of $17.55, they still have a steep climb ahead to its original IPO price of $38. Additional lockup expirations, which will allow insiders to sell their stock, may put additional pressure on the stock. However, the company's strong mobile results may convince investors to give the fallen stock another chance. The company still trades with a feverish trailing P/E of 130.7, making it a speculative play that is prone to dramatic price swings. By comparison, its professional social networking peer LinkedIn (LNKD: Charts, News) trades at 925.7 times trailing earnings, but has risen 16% since its first day of trading last May. Other News About FB Facebook Sales Top Estimates as Companies Warm to Mobile Ads Facebook tops on both top and bottom line estimates. Facebook Shares Soar After Beating Estimates on Mobile Facebook's mobile ad revenue soars. Other Stocks in the News Apple's Slim iMac Far Outshines the New iPad Mini Apple unveils new products, but investors are still sitting on the sidelines. Hudson City Bancorp Earnings: Profit Down Hudson City's earnings continue to stagnate. Copyright 2012 by InvestorGuide.com, Inc. 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Published on Oct 25, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2016. Content published with author's permission.

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