3 Reasons Facebook May Move Higher Next Week
Jul 21st 2012 12:11PM
Updated Jul 21st 2012 12:12PM
It's finally time to pay attention to Facebook's (NAS: FB) news feed.
The social-networking website operator reports its second-quarterly results on Thursday -- its first report as a public company -- and there's plenty at stake. The stock continues to trade below its May IPO price of $38, and skeptics are everywhere.
There are concerns that traffic to the namesake site is slowing, and it certainly didn't help that General Motors (NYS: GM) went public with its decision to stop advertising on the website shortly before May's IPO.
However, there are also plenty of reasons to believe that Facebook will impress the cynics next week. Let's dive right in.
1. The IPO drought has come and gone
An immediate reaction to Facebook's cascading debut was to slam the brakes on the IPO market. Prospective debutantes didn't even dare to go public in the wake of Facebook's belly-flop, and it was several weeks before any company had the gall to actually go public.
That was been just two months ago, but the market has returned to embracing dot-com IPOs. Kayak (NAS: KYAK) , the popular website that scours several travel websites and providers to aggregate rates on lodging and flights, went public on Friday.
There was no more Facebook fallout. Kayak's stock opened a hearty 14% higher than its IPO price.
2. The ads are adding up
Investors have been concerned about the effectiveness of Facebook ads -- in part because of GM's defection -- and the challenges of monetizing the mobile platform that is quickly become the way users engage with the site.
There was some encouraging news on both fronts earlier this week.
TBG Digital's Global Facebook Advertising Report Q2 2012 finds that advertisers are now paying 58% more per impression on Facebook than they were a year ago. That's a sharp contrast to Google (NAS: GOOG) , which reported this week that advertisers were paying 16% less for a lead on its website in its latest quarter.
Companies are paying more on Facebook because the website is getting better at targeting its ads. Its latest move, inserting in news feeds "sponsored" posts by companies that a Facebook friend already likes, has been a brilliant way to improve its desktop marketing effectiveness and introduce advertising in mobile. TBG Digital's study shows that click-through rates have moved 11% higher over the past year.
Between the higher ad rates and healthier click levels, Facebook's revenue and profitability should be growing dramatically faster than what may be a merely modest increase in page views.
3. You get only one chance to make a first impression
Facebook was reluctant to go public and Mark Zuckerberg isn't a fan of traditional rites of public companies, but the company knows how important this quarter will be.
Analysts see Facebook earning $0.12 a share when it reports on Thursday. The smart money has to be on a bottom-line beat.
Sure, Zuckerberg doesn't want to resort to managing earnings. The last thing he wants is to spoil investors into expecting quarterly miracles on the bottom line. However, Zuckerberg knows that this matters. A bad report will translate into a sluggish share price, and a busted IPO will make it that much harder to retain important employees and attract new ones.
There may very well be a quarter when Zuckerberg thumbs his nose at conventional expectations, but it won't happen now. Facebook won't miss at a time when its IPO has become a comedic punch line. There's a lot to prove, and for once Zuckerberg will live up to his role as a CEO of a public company.
A discounted share price and a strong report should help move Facebook higher in the week ahead.
The article 3 Reasons Facebook May Move Higher Next Week originally appeared on Fool.com.The Motley Fool owns shares of Google and Facebook. Motley Fool newsletter services have recommended buying shares of Google and General Motors. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.
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