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A figure in Alphabet's earnings report may signal Facebook will beat the Street

  • Facebook's advertising revenue has been 93 percent correlated with Alphabet's "core sites" revenue, according to Citi Research.
  • Shares of Alphabet fell as much as 3 percent in after hours trading yesterday following worse-than-expected traffic acquisition costs, a fate that Facebook will avoid, the analyst said.

Facebook shares fell in the premarket Tuesday after the earnings report for internet competitor Alphabet disappointed investors, who sent shares of the Google-parent down more than 3 percent.

But Citi Research believes these investors are wrong and that actually a figure within the Alphabet's earnings report points to a better-than-expected result from Facebook when the social network reports after the bell Wednesday.

Citigroup analyst Mark May's Tuesday note to clients points out that Facebook's advertising revenue was 93 percent correlated with Alphabet's "core sites" revenue over the last five quarters.

Source: Citi Research

"GOOG's 2Q17 results imply upside to FB expectations in the quarter," May wrote.

Based on that correlation, Citigroup's model predicts a 51 percent year-over-year boost in advertising revenue in the second quarter for Facebook.

We "view the checks on Google's core search business and Google's reported results as the most reliable indicator of Facebook's revenue trends," the analyst added.

So therefore May predicts Facebook earned $1.44 a share in the second quarter, which is way above Wall Street's consensus view. (Analysts are currently expecting EPS of $1.12, according to FactSet, but it's unclear if that figure is exactly comparable to Citi's estimate.)

Facebook's stock has been a leader in internet equities this year, up nearly 45 percent year to date. The social media giant has been propelled by reports of continued innovation and strong advertisement numbers as it looks to monetize its Messenger and WhatsApp platforms.

"We are encouraged by the company's continued strong pace of innovation and view these efforts as supporting our long-term forecasts and Buy rating. We continue to rank Facebook as our top pick," stated the report.

Citigroup's 12-month price target on Facebook is $190, representing 14 percent upside from Monday's close.

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