Three Reasons the Facebook Earnings Report Will Disappoint

By , Money Morning •

The Facebook earnings report for Q2 will be released Thursday after market close - meaning investors have a chance to see if concerns over Facebook's revenue and growth are warranted.

It's only been two months since Facebook's (Nasdaq: FB) long-awaited May 18 IPO. The day didn't exactly turn out as planned with Nasdaq's technical problems delaying trading and a measly one-day gain of 23 cents.

The result has been a lingering frustration among investors who hoped they were buying the next big tech stock - and are now in the red.

Since then, Facebook stock has fallen 24%.

Editors Note: It’s surprising Facebook stock has only fallen that far - here’s what it’s really worth..

A lot of expectations and answers should come with the Q2 earnings Thursday, but we're not so sure they'll be the answers investors have hoped to hear.

Here are three reasons we think the Facebook earnings report will disappoint.

Facebook Q2 Earnings: Declining Revenue Numbers

In the first quarter, Facebook reported revenue of $1.058 billion, up 45% from the previous year, but down 6% from the fourth quarter of 2011, based on the number disclosed in its April 23 Securities and Exchange Commission filing.

For the second quarter, analysts have estimated revenue at $1.1 billion on 12 cents per share, reported The Wall Street Journal. With these numbers, Facebook can argue its on the way to a $100 billion valuation, as stated in its IPO.

But can the social media giant really hit these numbers? In the last year, Facebook has seen a declining revenue growth rate.

Citigroup (NYSE: C) analyst Mark Mahaney told The Journal that the company's "business has been showing significant revenue-growth deceleration. The market valuation implies at least a stabilization of revenue growth this year and next year."

The drop in revenue growth has come from members using Facebook's mobile site. Among Facebook's 900 million global users, more than half utilize access the site through mobile devices.

While this convenience is great for users, the company hasn't figured out the magic formula to monetize this traffic.

According to InvestorPlace, analysts have forecast Facebook to incur a 30% revenue increase, which would be a decline from the first quarter's 45% growth.

No High Hopes for Ad Sales

Since announcing its first quarter report on April 23, questions have been rising about the effectiveness of the site's ads.

In the days before Facebook went public, General Motors Co. (NYSE: GM) used an uproar when it pulled $10 million in ads from the site, claiming the ads weren't enticing members to purchase cars.

This didn't seem too surprising.

At the time, Nate Elliott, an analyst at market research firm Forrester (Nasdaq: FORR), told The Journal, "Companies in industries from consumer electronics to financial services tell us they're no longer sure Facebook is the best place to dedicate their social marketing budget-a shocking fact given the site's dominance among users."

But there is a chance GM may have had a change of heart. Earlier this month, Bloomberg News reported the company may again purchase ads on Facebook - if an appropriate return on investment was possible.

The uncertainty surrounding ad revenue hasn't helped with shareholder retention. It is something Facebook should address in Thursday's earnings conference call, and give investors a reason to believe more companies won't go the way of GM.

The Zuckerberg Effect - or Lack Thereof

Speaking of the earnings call, there's the popular question regarding Facebook's Chief Executive Mark Zuckerberg: Will he show up Thursday?

After his indifference to Facebook's IPO roadshow by wearing his trademark hoodie and sporadically appearing at presentations, the likelihood of his participation on the call is low.

Andre Sequin, an analyst at RBC Capital Markets in New York, told Bloomberg of Zuckerberg's likely absence, "He's made it quite clear he's much more interested in running the operation, and spending his time thinking about product development and the future of the company, than worried about this side of the process."

It isn't completely unusual for a CEO to miss an earnings call and in Facebook's case many of its financial responsibilities sit with Chief Operating Officer Sheryl Sandberg and Chief Financial Officer David Ebersman.

But after Facebook's bumpy IPO and declining share price, having its CEO on the call would provide reassurance to investors about the company's long-term plans and exemplify engagement. It's a great opportunity for him to answer questions about actions in the last few months, provide details on the company's mobile strategy and gain some credibility that has been recently lost.

And if he doesn't show, it'll be a huge blow to shareholder confidence.

"Zuckerberg should show up on the call, not necessarily to read the income-statement stuff, but to simply come on and make some strategic remarks, and be available to answer some strategic questions," John Palizza, a lecturer at the Jesse H. Jones Graduate School of Business at Rice University in Houston, told The Washington Post. "He should be there to show he's engaged, he cares about the investor."

Wall Street has a one-year price target on FB of $38. With two trading days left before the Facebook earnings report, Facebook stock opened Wednesday morning with a 1.5% gain then slipped by 0.7% within the first hour before reversing to gain again.

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