J.P. Morgan analysts Doug Anmuth, Kaizad Gotla, Diana R Kluger, and Bo Nam rate Facebook Inc (NASDAQ:FB) as a Buy, as they are expecting strong 4Q results driven by mobile and news feed from Facebook.

Facebook

Facebook Inc (NASDAQ:FB) reports 4Q13 earnings Wednesday, January 29th, after the close. We expect strong 4Q13 results with likely upside to our $2.14B in advertising revenue (+61% Y/Y, +19% Q/Q) driven by Mobile and Desktop News Feed ads. We believe advertiser demand in the quarter continued to build and comScore data suggests continued strong engagement, especially in December.

Facebook Inc (NASDAQ:FB)’s mobile advertising should surpass desktop in 4Q13 and we expect mobile to account for 63% of total ad revenue in 2014. Beyond 4Q results, we’ll be focused on management’s commentary on ad load, teen engagement, 2014 opex growth, and the launches of Instagram ads and auto-play video ads on Facebook. We believe advertiser demand and ads quality should more than offset slower increases in ad load, thereby driving higher relevancy and click-through rates, and ultimately greater ad quantity over time. We note that our PF EPS estimates of $1.22 in 2014 and $1.67 in 2015 arecurrently 9% and 12% above consensus and we believe Instagram and video ads could drive further upside. Facebook remains our favorite idea in 2014.

Updated estimates for Facebook’s mobile estimates

We have tweaked our estimates higher and now project 4Q revenue/EBITDA/PF EPS of $2.34B/$1.44B/$0.28 compared to consensus of $2.35B/$1.45B/$0.27. Our Advertising revenue projection of $2.14B (+61% Y/Y, +19 Q/Q) is driven by $1.16B in Mobile Advertising (+31% Q/Q) and $982M in Desktop, a 7% Q/Q increase. We estimate Payments revenue of $201M (-21% Y/Y), but note the difficult Y/Y compare due to a one-time accrual in 4Q12. Third-party data points suggest strong advertiser demand on Facebook Inc (NASDAQ:FB). Kenshoo saw its overall client ad spend on Facebook increase 100% Q/Q driven by a 66% Q/Q increase in clicks and a 21% Q/Q increase in CPCs. Kenshoo also noted a 10% Q/Q increase in click-through rates in 4Q, which we expect to continue through further ad quality improvements in 2014.

News Feed ad load main driver for Facebook’s revenue

Increasing the ad load for the News Feed was an important driver of Facebook Inc (NASDAQ:FB)’s ad revenue growth in 2013, though we believe users, engagement, and ad quality/pricing have also been significant monetization drivers. Facebook has indicated that it expects slower ad load growth going forward and that future monetization gains are likely to be driven more by ad quality improvements. In addition to user/engagement growth, we expect improvements in ad targeting and quality should drive higher click-through rates in 2014, resulting in higher eCPMs. We note that the majority of Facebook ads are purchased on a CPC basis and the majority of ads don’t get clicked on, suggesting click-through rate improvements should have a significant positive impact on monetization—without increasing the ad load.