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Market Update

Earnings on Tap: Facebook

The pressure is on Facebook to deliver, but can it effect a turnaround this quarter?

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Social-networking giant  Facebook (FB) will report third-quarter earnings after market hours Tuesday, only its second financial report as a public company. Wall Street analysts expect earnings of $0.07 per share compared with a loss of $0.08 in the preceding quarter. Last year this time, Facebook was still a private entity and reported revenues of $954 million while net income stood at $227 million. 

Investors are expecting the worst after game maker
 Zynga (ZNGA), which contributed 14% of Facebook's revenue in the first six months this year, announced downbeat preliminary financial results earlier this month. Zynga also scaled back outlook for the full year.

Morningstar senior equity analyst Rick Summer believes revenue growth and profits might stumble because of a lack of near-term visibility and "cloudy advertising metrics." Indeed, investors will be looking for signs of how well Facebook is able to monetize its 1 billion user base and its plans with regard to advertising revenues, particularly over a mobile platform.

After a whopping 50% drop in its share price since the May IPO, the stock trades at a significant discount to Summer's fair value estimate. He envisages a brighter future for Facebook over a longer time frame.

Rouhan Sharma does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.