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Facebook Earnings Report: Three Things to Watch

By , Contributing Writer, Money Morning •

The Facebook earnings report due out Thursday is sure to bring excitement to this otherwise slow summer earnings season.

Facebook Q2 earnings will come out after market close Thursday, in the Menlo Park, CA-based company's first report since going public.

There is no doubt that Facebook (Nasdaq: FB) would love to put its fiasco of an initial public offering behind it. But since the company's disappointing IPO was marred by technical glitches and concerns about its valuation, Facebook will be under intense scrutiny.

Analysts polled by Thomas Reuters expect Facebook Q2 earnings of 12 cents a share on revenue of $1.1 billion. Those are the minimum numbers needed to hit the lofty $100 billion valuation Facebook claimed it was worth when it debuted on May 18.

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Since expectations have been lowered, analysts think Facebook earnings will hit the Q2 target.

"We think it is unlikely that Facebook will miss Q2 consensus estimates, which dropped after May 9's revised Form S-1," investing firm Wedbush said in an earnings preview report on the social network. "The underwriters likely advised Facebook to beat Street expectations for its first public quarter; this became more achievable now that estimates have declined."

Just as important as the numbers will be if Facebook delivers answers to all the questions that shareholders have been dying to ask.

Here are the three things- besides how Facebook stock reacts - you should watch when the Facebook earnings report comes out Thursday.

Facebook Q2 Earnings: Where's the Money?

The number one concern amid scores of investors is how Facebook's revenue is holding up - and how it'll grow.

Worries have spread that the company's sales tempo is waning. In the first quarter of 2012, revenue slumped from the last quarter of 2011.

Ever since General Motors Co. (NYSE: GM) hit the brakes and pulled out of some $10 million of ads on Facebook just days before the hugely hyped IPO, questions have mounted as to whether ads on Facebook's site actually payoff. GM maintains there is no indication that ads on the site drove people to buy more cars.

"Advertisers need more proof that actual advertising on Facebook offers a return on investment," Debra Aho Williamson, an analyst with market research firm eMarketer, told the Economic Times. "There is such disagreement over whether Facebook is the next big thing on the internet or whether it's going to fail miserably."

Will Facebook Get a Handle on Mobile?

Facebook continues to grapple with how it can make money off the explosive mobile market, an arena it was late entering and one where it lags.

Of Facebook's 900 million worldwide user base, over half tap into the site via their smartphones or tablets. Facebook languishes in garnering mobile ad revenue and has been scrambling to get a strong foothold in the area.

In the immediate days leading up to the fabled IPO, Facebook revealed in a regulatory filing that its mobile user growth (where it doesn't earn money) was outpacing its growth in ads. That revelation caused a frenzy among its oversized underwriting team, causing them to do a stark about face and change their outlooks for revenue based on the fresh information.

Reaching mobile users is a crucial part of Facebook's ad strategy.

Investors should watch and see what the Facebook earnings report indicates about mobile revenue.

"If [a revenue miss] is related to shift in mobile, but the mobile monetization is improving, that's different than just a miss because advertisers are leaving Facebook," Colin Sebastian, an analyst with Robert W. Baird, told Reuters.

How "Friendly" Are Facebook Users?

Also of note Thursday will not only be the number of users it has amassed, but also the numbers that visit daily and monthly. Last quarter those numbers were 526 million and 901 million, respectively.

A report out last week from Capstone Investments suggested that Facebook's massive user count dipped 1.1% in the last six months. However, Raymond James analyst Aaron Kessler estimated Facebook will increase its active users by 30% in 2012 and 24% in 2013.

But, the bigger concern is monthly user numbers.

Morningstar analyst Rick Summer told The Wall Street Journal, "Any decline in [monthly active users] is a bigger concern because if people go 30 days without looking at [Facebook] that means Facebook isn't part of your social fabric anymore."

Facebook Stock Price

Facebook stock has a lot riding on its earnings report. Shares have fallen more than 26% since it was priced at $38.

"If they miss, it would be catastrophic for the stock," Michael Binger, a portfolio manager with Gradient Investments, told Reuters.

This quarter earnings report will tell us if Facebook will start a trend of delivering earnings guidance, or take the lead of Google Inc. (Nasdaq: GOOG) and Amazon.com Inc. (Nasdaq: AMZN) and avoid giving forecasts.

"This first time out, I think they have to give some sort of guidance," Robert Bacarella, manager of the Monetta Fund, told Reuters. "You pacify the near term and say 'Here's where we're going.' But then you set the table up to say: 'We're thinking about whether or not it's wise give guidance going forward."

We'll find out Thursday what Facebook has to say - and how investors will react. Facebook stock fell a mere penny, or 0.03%, to $28.75 on Monday, three days before the Facebook earnings report release.

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