Facebook's earnings: It's all about mobile

All eyes are again on Facebook as it prepares to report fourth-quarter earnings, a make-or-break event that will determine whether the social network can continue its remarkable recovery from a stock market coma induced by a disastrous initial public offering.

Facebook, Wall Street's one-time punching bag, went from zero to hero with its share price swelling more than 60 percent from $19 and change to more than $31 in the past three months. Even an investor-disappointing Graph Search announcement did little to sway the social network's upward momentum. Today, Facebook, while still below its IPO offer price of $38, looks surprisingly healthy at $31.54.

So what happens now? Wall Street's consensus is that the social network will report $1.52 billion in revenue and earnings per share of $0.15. Should Facebook miss or clobber the top line number, the stock will move, but more is at stake. Facebook needs to show that its milking more money from its growing mobile audience, that other cash-making strategies are truly working and, above all, keep the Street convinced that its business is on the right track.

Zero to hero in 90 days
Toward the end of October, Facebook looked like a dud. The social network's shares were trading at around half of its IPO price of $38. Investors and analysts had zero confidence in the company's ability to profit from users who were quickly shifting their attention from desktops to smartphones and tablets. And there was fear that end-of-year lock-up expirations on those suddenly able to see pre-IPO shares would drive the stock price down further.

When Facebook reported its third-quarter earnings, however, the company proved to investors that it was serious about making money, particularly on mobile, where it now has 604 million monthly active users. Overall, mobile accounted for 14 percent of Facebook's advertising revenue, or roughly $152.6 million, in the third quarter. At the time, Facebook also said that it was making $3 million per day from so-called Sponsored Stories in the News Feed on mobile phones and tablets.

That mobile successes lessened the fear among investors that mobile was such a big risk for Facebook -- a fear that Wedbush analyst Michael Pachter says was overblown. "I've had a $35 target since July," he said. "I refuse to budge."

Ultimately, the fundamentals of the company have not changed in the past 90 days, Pachter said. Instead, fear around mobile subsided. CEO Mark Zuckerberg personally helped dose out the everything-is-A-OK meds when he stressed how strong Facebook was performing on mobile.

But what now?
Facebook is entering Wednesday's earnings report in a position of the strength.

The social network successfully mitigated sizable lock-up expirations in October, November, and December, which added 1.2 billion shares to the public pool. The company is also now in its seventh month of offering Sponsored Stories, or status updates from brands who pay to promote their stories in members' News Feed, which means it should be able to show dramatic revenue growth from the desktop- and mobile-friendly units. Facebook also pushed its Gifts products out to all U.S. members before the holiday, ramped up its efforts to allow developers to pitch people on their applications through mobile app install ads, and started charging to deliver messages to strangers.

Some of these products may each only contribute between $20 million to $100 million to Facebook's bottom line, Pachter said, but so long as Facebook shows that the percentage of advertising revenue derived is growing on mobile, investors will be pleased. Pachter predicts that Facebook will report 17 percent of advertising revenue from mobile products in the fourth quarter.

Of course, Wall Street wants to hear more about Graph Search. Analysts are particularly curious about the potential financial impact of the curated search tool, as detailed in RBC Capital Market's pre-release report on Facebook.

They also want to hear from Facebook about the Instagram privacy policy debacle and understand whether there has been a measured drop off in users or activity, and they want to be reassured that Facebook will keep its spending in check. Should Facebook not satisfy queries in these areas, the company could be in jeopardy of losing some of the ground its picked up in recent months.

"We continue to like Facebook shares and view the company as arguably the most under-levered name in the Internet sector," RBC concluded.

The firm identified positive, neutral, and negative results, as pictured above. Basically, Facebook will really bring home the bacon if it can surprise Wall Street with $1.54 billion in revenue, earnings per share greater than $0.15, more than $1.25 billion in ad revenue, and more than 640 million daily active users. Conversely, anything lower than $1.52 billion in total revenue and $0.14 earnings per share will be miss. RBC's financial estimates have Facebook sliding into position somewhere between the negative and neutral zones.

It's a far simpler equation for Pachter, who views the social network with rose-colored glasses.

"[Facebook] has done everything right," he said, "and they will continue to do everything right."