NEW YORK ( TheStreet) -- As Facebook ( FB) prepares to report earnings after the market closes on Tuesday, investors will be looking for signs the social network is making progress on efforts to monetize its billion-member-plus user base and that it has a strategy to transition users and advertisers to mobile devices. In fact, Facebook's earnings may be more about whether trends in the social network's usage and revenue generation improve its earnings outlook over whether the Mark Zuckerberg-run company meets Wall Street estimates for the quarter. The company's quarterly results also come just days after Google's ( GOOG) weaker-than-forecast earnings indicate the company is struggling to shift its search results mobile. Analysts polled by Thomson Reuters expect Facebook to earn 11 cents a share on sales of $1.2 billion in the third quarter, and few have made big changes to the company's earnings outlook headed into the quarter. While some are bracing for Zuckerberg & Co. to beat consensus, the real question that may drive shares is whether revenue and usage trends are on the upswing after the company's earnings debut failed to impress. Key to Facebook's outlook will be progress on its mobile revenue as desktop ad sales are expected to drop. Evan Wilson of Pacific Crest Securities said he sees reason to be cautious as decelerating usage trends on the social network may outweigh what could be an earnings beat on revenue and estimates on earnings per share. "We continue to see risk to Facebook in the near term, but are not as concerned about headline revenue and EPS relative to Street estimates. We believe Face- book's increasingly aggressive monetization tactics should reaccelerate revenue the way the market is expecting," wrote Wilson in a research report outlining earnings estimates. "Facebook has been aggressive on monetization, but we still think it is in search of the original promise of social advertising," the analyst added. Of particular interest will be whether non-social ads that Facebook is now selling into desktop user's news feeds will generate meaningful revenue, and whether the notion of social ads based on "likes" and comments begin to bear fruit. On the downside, user time and visits to the social network may continue to fall as consumers shift from desktops to mobile devices. "With the focus on monetization, we think this could be a negative surprise that would make the revenue acceleration look to be lower quality," wrote Wilson of the prospect daily average user numbers could fall. Like many businesses undergoing rapid growth and transformation, Facebook's earnings appear to hinge on whether the company's overall earnings prospects improve as users shift from desktops to mobile devices. Justin Post of Bank of America Merrill Lynch said he sees Facebook beating third- quarter earnings estimates but said the key will be whether the direction of overall ad revenue is accelerating or decelerating. The key for Facebook will be whether surging mobile revenue growth rates are enough to offset an expected decline in desktop usage and revenue. Post is optimistic Facebook can deliver on a mobile transformation that will bolster the company's 2013 earnings outlook. "We estimate that mobile revenues could reach $90mn in Q3, up from roughly $25mn in 2Q, although PC revenues could be down q/q (some revenue cannibalization)," writes the analyst in an earnings primer. Still there's reason tor investors to temper optimism because of the execution risks in Facebook's shift to mobile. "Facebook is in the midst of a mobile usage transition and we are cautious on Facebook's near-term revenue trends until new mobile ad revenue models start driving the top line," noted Post.
In fact, as with Apple's ( AAPL) iPhone 5 launch, Facebook may face the challenge of meeting user demand for its products as it rolls out new ways to advertise on the network. "
There is legitimate near-term concern that faster-growing mobile usage could be displacing higher CPM PC-usage faster than management can ramp up mobile ad monetization," wrote Youssef Squali of Cantor Fitzgerald. The bull case on Facebook has long centered on the network's still unquantifiable earnings prospects and its growing popularity, but investors should also take stock of obvious risks to the company's share prices through year-end. In particular, Facebook faces a lockup expiration, where $1.2 billion of shares -- 700 million shares in total - could hit the stock market in the next three months, noted William Bird of Lazard Capital Markets. Meanwhile, economic weakness in Europe and a muddled picture on fees paid by social gaming giant Zynga ( ZNGA) are obvious risks headed into the quarter. In October, Zynga badly missed earnings and cut guidance for the second consecutive quarter. In September, TheStreet noted that political election year ad spending may be one of the biggest positive surprises for the earnings of publicly traded media companies through 2012. With social media now firmly in the business of selling political ads, one of the more intriguing contests of this election cycle may be whether record ad spending helps to reinforce the business models social networks like Facebook, Pandora ( P) and Twitter. It's the first election season during which social media giants are making their pitch for a bigger share of the political dollars that typically go to established Web players like Google ( GOOG) and Yahoo! ( YHOO), as well as broadcast giants like Time Warner ( TWX), CBS ( CBS) and Disney ( DIS). Some analysts expect ad spending this election cycle to add meaningful third- and fourth-quarter revenue for Facebook and Pandora. Arguably even more important than a prospective earnings boost will be whether the social media giants prove their respective business models work in generating ad dollars as investors demand a clearer picture on platform monetization. Michael Pachter, a managing director of research at Wedbush Securities, gave TheStreet a back of the envelope calculation that social networks may see an election cycle revenue boost of more than $100 million in the second half of 2012. He sees up to $5 billion in overall presidential and congressional ad spending this election season with roughly 10% allocated to the Web. Watch for any positive numbers on political ad spending to be a key earnings surprise, as investors and analysts parse whether Facebook's transition to mobile use can improve or cloud the social network's earnings prospects. For more on Facebook, see why the company's valuation shouldn't be a trick question on Wall Street. Also see why a venture capital investor says to think long-term on Facebook after its weak post-IPO performance. -- Written by Antoine Gara in New York