Investors ready to dissect Facebook earnings report

Earnings aside, its ad viability is under scrutiny

Social networking company must show how it plans to profit as users shift to mobile.

Matt Krantz

Facebook fans on Wall Street are hoping things go better this time.

When the No 1. social-networking company reports third-quarter earnings after the close today, investors are looking for it to give a better outlook on key issues, including how it plans to make money from less-profitable users increasingly accessing the site from mobile devices.

The financial results of the third quarter “are less important than the trends in the business,” says Colin Sebastian, analyst at Robert W. Baird. “What makes Facebook a potential investment is whether it is a legitimate ad platform or not.”

Analysts are expecting the company to earn 6 cents a share based on generally accepted accounting principles, and 11 cents a share after adjusting for one-time items, says S&P Capital IQ.

In the second quarter — the only other time Facebook reported earnings — it lost 8 cents a share based on formal accounting rules, and lost 25 cents a share on an adjusted basis. Omitting several costs, including non-cash charges connected to stock options, Facebook earned 12 cents a share in the second quarter. The results matched expectations, but the stock fell because investors had hoped for a positive surprise.

Investors will pick apart the third- quarter earnings report, paying close attention to:

uThe shift to mobile usage. The increasing use of Facebook on mobile devices is a threat to the company, as it’s more difficult to place ads on the small screens of smartphones, says Jordan Rohan of Stifel Nicolaus. Facebook has been experimenting with ways to deal with this issue, and investors want to see signs of progress, Rohan says. “Facebook has to show real progress in monetizing mobile,” he says.

uPricing power with traditional advertising. Not only does Facebook have to show it’s making solid strides in mobile, investors also will want to see evidence that ads on the website are commanding better prices, says Mark Harding of JMP Securities.

“If investors see a slowdown in ad pricing, that will be viewed negatively,” he says.

uFallout from Zynga. One of Facebook’s biggest sources of revenue comes from online game company Zynga. Zynga accounted for 10% of Facebook’s revenue this year. Investors want to see Facebook diversify, especially after Zynga earlier this month said it expects to lose money in the third quarter, Harding says.

Analysts remain bullish on the stock long term, and the average analyst rating is “outperform.”