Will Facebook (FB) Surprise Q2 Earnings Estimates?

Facebook, Inc. FB is set to report second-quarter 2014 results on Jul 23. Last quarter, the company posted a 38.89% positive surprise. It is noteworthy that Facebook has outperformed the Zacks Consensus Estimate in the preceding four quarters with an average positive surprise of 27.3%.

Let's see how things are shaping up for this announcement.

Growth Factors this Past Quarter

We believe that Facebook's growing mobile user base, Instagram's increasing popularity and international expansions will boost its advertising revenues in the quarter. We believe that strong mobile revenue growth will be a key catalyst. Facebook will also benefit from the launch of Facebook Audience Network FAN, a mobile ad network.

Facebook's focus on improving user engagement through frequent product updates and new features are the positives amid intensifying competition from Google and Twitter. However, aggressive acquisition policy can weigh on the balance sheet.

We note that both WhatsApp and Oculus are long-term growth opportunities. The Internet.org initiative is also long-term focused. Lack of revenues from these initiatives can put Facebook's core business under significant pressure in the near term.

Earnings Whispers?

Our proven model does not conclusively show that Facebook is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP:  Most Accurate estimate stands at 27 cents while the Zacks Consensus Estimate is lower at 26 cents. That is a difference of +3.85%.
 
Zacks Rank: However, Facebook's Zacks Rank #4 (Sell) lowers the predictive power of ESP.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider    

Here are other stocks which you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:  

Silicon Motion SIMO, with an Earnings ESP of +33.33% and a Zacks Rank #1 (Strong Buy).

Western Digital WDC, with an Earnings ESP of +4.02% and a Zacks Rank #2 (Buy).

F5 Networks FFIV, with an Earnings ESP of +3.81% and a Zacks Rank #2.