Facebook (NASDAQ:FB) will release its Q4 2013 earnings on January 29th. We expect another strong quarter showcasing the continued uptake of mobile advertising and the growing strength of the company’s balance sheet. Even though Facebook recently decided to raise additional money through a follow-on offering, it should not be misinterpreted as a sign of weakening business and therefore, does not impact our expectations for the fourth quarter (see The Impact Of Facebook’s Follow-On Stock Offering for details). The platform’s ad monetization has ramped up significantly over the course of last year, and EBITDA margins are hovering over 50%. The balance sheet seems strong with a net cash balance of close to $8 billion at the end of Q3 2013. The sequential growth in ad revenues, in tandem with any color around the trend of ad pricing, will give us more insight on whether the company’s ad monetization is nearing a ceiling. This is critical as this could signal material slowdown in the revenue growth going forward.
Our price estimate for Facebook stands at $38, implying a discount of about 30% to the market price.
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Mobile Is Likely To Remain The Key
Mobile continues to be the core of Facebook’s strategy, and we expect it to account for nearly 55% of the company’s total ad revenues during the fourth quarter. For Q3 2013, this figure stood at 49%. Approximately three-fourth of Facebook’s overall monthly active users are accessing the network through their smartphones, which points to the obvious: Facebook needs to optimize its advertising strategy on this platform. The results in recent quarters have been very encouraging, but there is still a long way to go as mobile represents roughly 12% of consumer media time but only 3% of the ad budget is directed to this channel. 
Facebook has witnessed a radical transformation in mobile ad business primarily due to the successful integration of news feed ads. These ads are designed to mingle naturally with regular Facebook feeds and updates, thus minimizing the negative impact on user experience and increasing their efficacy. The company has leveraged its vast data to make these ads as relevant as possible, which is why it is charging so much more from its advertisers now. Facebook’s ad revenues jumped 66% during the third quarter, due to a 16% increase in the number of ad impressions and 42% growth in ad pricing.  In some geographies, the prices increased even more. While the U.S. and Canada saw a decline in the number of ad impressions, the pricing went up by 60%. Although we expect something similar for the fourth quarter, a slightly difficult comparable period may result in some moderation in the growth rates. However, there is some evidence that improved ad design is paying off and advertisers are seeing better results.  This can allow Facebook to increase its ad pricing, thus sustaining strong topline growth. As a result, we expect strong double digit growth for average revenue per user.Notes:
- Facebook’s Q3 2013 Earnings Transcript [↩] [↩]
- Facebook (FB) Earnings Preview Q4 2014: Huge Jump As Improved Advertising Platform Draws Big Advertising Dollars, www.ibtimes.com, Jan 28 2014 [↩]