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Earnings Preview: Can Facebook and Zynga Stop the Bleeding?

Written by: Robert Weinstein 07/19/12 - 6:00 AM EDT
Tickers in this article: FB ZNGA
NEW YORK (TheStreet) -- After the biggest initial public offering in history, Facebook(FB) has disappointed investors large and small. Zynga(ZNGA) Facebook's big driver in traffic, is performing more like a lead zeppelin than a Led Zeppelin.

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Facebook is anticipated to report weak second-quarter earnings after the close on July 26. The consensus estimate is currently 9 cents a share. Based on $29 a share and 9 cents earnings for the quarter, the price-to-earnings multiple is over 80. I am not sure the International Space Station is at a much higher altitude. At the current level of profits, it will take over 80 years of earnings to pay for one share of stock.

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Facebook trades an average of 13.3 million shares a day with a market cap of $65.7 billion.

Over half the analysts covering Facebook rate it as a buy or strong buy; 14 of the 27 analysts covering the company give a "buy" recommendation. 11 analysts rate it a "hold" and two recommend selling.

Analysts are increasingly more bullish with Facebook; 12 out of 27 analysts now rate Facebook a "strong buy," up from six analysts a month ago. Compared to three months ago, even more analysts are rating this company as a "strong buy."

The average analyst target price for Facebook is $38.50. At a price of $38.50, it will take over 100 years of profits to pay for one share.

An investment in Facebook is an investment based on the company rapidly growing the bottom-line profits. I believe Facebook has room to grow revenue and profits, but expecting a fivefold increase is beyond my expectations. Facebook needs at least a fivefold increase to justify a price above $38.50.

TheStreet's Harry Schiller provides another viewpoint on Facebook. (You need a Real Money Pro account to read, but Schiller's analysis makes it worthwhile.)

Revenue year-over-year has increased to $1.97 billion last fiscal year compared to $777 million in the previous year. The bottom line has rising earnings year-over-year of $606.00 million last fiscal year compared to $229.00 million in the previous year.