Facebook must show it can reverse slowing ad sales, analysts say

Facebook: Where’s the beef?

That’s what analysts will be asking when the giant social network reports its third quarter earnings, its second as a publicly traded company.

Its stock is trading at less than half of its initial public offering in May. It can thank its rival Google, which reported disappointing results prematurely last week for dragging its shares even lower.

Analysts will be scrutinizing Facebook’s third quarter results that will be released after the market closes Tuesday.

The main question -- the real beef -- is whether Facebook can wring money from its users on mobile devices. Facebook earlier this year began showing its users ads on mobile devices called “sponsored stories.”

It has to make those inroads because a growing proportion of Facebook users are accessing the service from mobile devices, reflecting a fundamental shift that has also shaken up its online advertising rivals. Facebook now has 1 billion monthly active users, 600 million of whom log on from mobile devices. The Menlo Park, Calif., company has gone on the offensive, declaring itself a “mobile first” company that will figure out how to make money from its users on the smaller screen.

Facebook has a long way to go. It will rank only sixth in U.S. mobile ad revenue for 2012, with just under 3% of the market, according to projections from research firm EMarketer. Google, which is No. 1 in U.S. mobile ad revenue, will have 55%, up from 52% in 2011, EMarketer predicts.

Analysts will be scrutinizing third-quarter results for signs that Facebook has reversed declines in advertising sales growth. In particular, they will be focused on whether new advertising formats have begun to boost revenue. Facebook also recently dipped a toe into e-commerce with a gifts feature that prompts users to send real –- not virtual –- gifts to their friends on Facebook.

Still weighing on the stock: the expiration of lock-up periods in which employees can start selling their shares. There is one coming Monday and that could put new pressure on the stock. In all, Facebook has 692 million shares eligible for sale on the public market, according to a regulatory filing.

Analysts on average expect earnings of 11 cents a share on revenue of $1.2 billion. In the year ago quarter, Facebook was a privately held company and had net income of $227 million and revenue of $954 million.

“We remain bullish on Facebook as we believe advertising revenue can re-accelerate,” said JP Morgan Chase analyst Doug Anmuth.

But Pivotal Research Group analyst Brian Wieser says any miss of revenue growth expectations “would undoubtedly be met with a sell-off.”

“Investors with a low tolerance for near-term risk should still be cautious going into the quarter,” he said.

Sterne Agee analyst Arvind Bhatia reiterated his buy rating, saying “we think the sentiment on the stock is already quite negative and we believe the long-term opportunity for Facebook remains very large.”

But he also lowered his 12-month target share price to $26 from $37.

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