Buy This Giant on Earnings

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Facebook (NASDAQ: FB) is currently the best-placed technology giant with the potential to dominate the Internet advertisement arena in the near future. It is the only destination on the Internet that users visit consistently for no 'specific reason.' Services like Google (NASDAQ: GOOG)Yahoo! (NASDAQ: YHOO), YouTube, Whatsapp, and Skype are usually used for a specific purpose, while a social media website like Facebook becomes a part of one’s routine. The social media giant will report its quarterly earnings this week and a peek at the results of competitors reveals that Facebook can beat earnings estimates. If the company is able to beat estimates and improve mobile monetization further, the shares will rally.

Earnings Preview

Facebook will report its quarterly earnings this week. The key takeaway from these earnings will be the success of Facebook with its mobile monetization plan. The market expects Facebook to report earnings of $0.13 per share on revenues of $1.44 billion. As the table below shows, the company has not missed analysts’ expectations in the last three quarters and has beaten them in the last two quarters.

<table> <thead> <tr><th> <p><strong>Earnings History</strong></p> </th><th> <p>Jun 12</p> </th><th> <p>Sep 12</p> </th><th> <p>Dec 12</p> </th></tr> </thead> <tbody> <tr> <td> <p>EPS Est</p> </td> <td> <p>0.12</p> </td> <td> <p>0.11</p> </td> <td> <p>0.15</p> </td> </tr> <tr> <td> <p>EPS Actual</p> </td> <td> <p>0.12</p> </td> <td> <p>0.12</p> </td> <td> <p>0.17</p> </td> </tr> <tr> <td> <p>Difference</p> </td> <td> <p>0.00</p> </td> <td> <p>0.01</p> </td> <td> <p>0.02</p> </td> </tr> <tr> <td> <p>Surprise %</p> </td> <td> <p>0.00%</p> </td> <td> <p>9.10%</p> </td> <td> <p>13.30%</p> </td> </tr> </tbody> </table>

Source: Yahoo Finance

Major competitors such as Google and Yahoo! have already reported their quarterly results and these results indicate that Facebook will be able to beat analyst’s expectations. In the recently reported quarter Google beat earnings estimates due to better than expect CPC and paid click growth of more than 20%. Revenues from international and local markets have shrunk overall due to tough completion form Facebook in the display segments.

Yahoo! also reported its quarterly results last week, beating EPS but missing on the top line. The company reported an 11% y/y decline in display segments, which can also be attributed to the tough competition from Facebook. These results show that while CPC have been better than expected, revenues have gone down, which could be due to growth in Facebook's revenues. Therefore, investors should expect that the technology giant will easily beast street estimates.

Facebook advertisement tool

According to recent developments reported by The Wall Street Journal, Facebook is making some big moves to compete with Google’s high-quality placement. The company has recently partnered with major data players like Acxiom, Datalogix, and Alliance Data Systems. Facebook will launch a new advertisement tool that has been developed using data from these partners. This tool will combine information that the company already has and match it to different types of data gathered by these giants, things like web page visits and email lists.

The two combined data sets will make advertisement efforts more precise and relevant. Facebook already has information about page likes, friends, and group likes, and data brokers like Datalogix gather information about consumer purchases and buying trends. The companies don't share personal information that can be harmful to users, like emails and phone numbers, with advertisers, but they do release information about behaviors and trends. The two combined data sets will empower advertisers to select overlapping categories that match their own target market. According to experts, the tool will have a similar affect to Google’s search-results-based marketing tactics.

Customer response

Facebook is already the second largest Internet advertisement company in America, and this new direction will ensure that advertisers find it an attractive placement platform. General Motors had discounted its Facebook campaign, but the automotive giant is considering Facebook marketing once again. General Motors will use the new tool to target a younger user group, according to the Wall Street Journal. Neiman Group has also started to advertise through Facebook once again. According to the groups’s VP of Digital Marketing, the new tools make targeted communication possible. PepsiCo is another major player that is now using Facebook as one of its key marketing channels.

Industry potential

The Internet advertisement industry is one of the fastest growing in the world. According to Reuters, the U.S. Internet advertisement market grew by 15% last year to $36.6 billion. According to PWC, mobile advertisements have played a major role in growth, with revenue from mobile devices almost doubling during the last year alone. Google is the market leader right now with revenue of $16.9 billion. Facebook is emerging as a serious force in this space, having captured $2.6 billion of the $15.4 billion display ad market.

Bottom line

Facebook has a large following of more than one billion users spread across the globe. According to IDC research, approximately 2/3 of these users spend an average of approximately 30 minutes on Facebook every day. The recent advertisement success in the U.S. is just the tip of the iceberg, and this social giant has the potential to dominate the Internet advertisement arena in the days to come. The new tools will ensure that, along with consumers, the company is able to provide the best advertisement technology to clients. Despite this high potential, the stock is still trading way below its mean sell side target price of $33, and offers an upside of 22% at these levels. Investors have a perfect opportunity to buy this giant on earnings and enjoy the earnings beat rally.

Mohsin Saeed has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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