Four Reasons Facebook Stock Could Tumble After Earnings Report

Facebook stock rose nearly 3% Tuesday to come within $11 of its IPO price – but a disappointing earnings report could send shares plunging if the social media giant doesn't show healthy improvement.

One of the biggest things to watch when Facebook Inc. (Nasdaq: FB) reports Q1 earnings after the close Wednesday will be how the company is managing the transition to mobile.

Fourth-quarter results showed improved mobile ad revenue and mobile user numbers from the previous quarter. While the trend is expected to continue, the social network behemoth will need to impress Wall Street if it wants investors to stick around.

Shares have stalled since hitting $33 in January, the highest price since the stock peaked shortly after the IPO. Year-to-date, shares are down roughly 20%, well below the 11% gain for the broad based Standard & Poor's 500 Index.

That kind of uninspiring showing amid record stock market rallies have left scores of investors with at least one foot out the door.

Investors are paying roughly $27 a share for a company that earned a paltry 2 cents a share over the last 12 months. That works out to a whopping price/earnings ratio of nearly 1,300.

Expectations for the Q1 earnings report are for a profit of 12 cents per share and revenue growth of 36% to $1.44 billion.

Even if Facebook posts better-than-expected results, the fate of Facebook stock is still fragile. Here's why.

Four Reasons Facebook Stock Could Plummet

Mobile ads are key to Facebook's future growth. Early investors will recall concerns over mobile growth were responsible for the 40% price plunge FB shares experienced shortly after its debut.

Indeed, users who access the social network from smarthphones and tablets tend to be more active than those who log on from desktop devices. But, mobile ads generate much lower ad rates than those from PCs.

Fourth-quarter revenue from mobile ads accounted for 23% of Facebook's revenue, up from zero six months earlier, eMarketer reports.  Facebook's mobile ad market is expected to grow 19% this year to $11.4 billion. Between 2013 and 2016, according to Gartner, mobile advertising will increase at a 29% annual rate to $24.6 billion.

In spite of that high growth rate, the mobile ad market is too small to have a meaningful impact on Facebook's $5.1 billion top line, Forbes notes.

Furthermore, Facebook's ambitious attempts to pry ad dollars away from Google Inc. (Nasdaq; GOOG) with the new HTC phone will be a struggle. The Internet giant is expected to take a hefty 53% of the mobile ad market this year, dwarfing Facebook's projected 13% share.