They say third time’s the charm, but no such luck for Facebook stock, which fell even though the company’s third earnings report since going public beat expectations.
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The numbers failed to charm Facebook Inc. (Nasdaq: FB) investors who expected the report would offer more to like, and analysis who found plenty of concern in the expenses.
The social networking giant posted earnings per share of 17 cents, better than the consensus of 15 cents. Revenue came in at $1.59 billion, up 40% year over year, and ahead of forecasts for $1.53 billion. However, fourth quarter profit slumped 79%, dragged down by higher costs.
The Menlo Park, CA-based company’s advertising business grew at its quickest pace since before the company’s initial public offering (IPO) on May 18, 2012, and contributed to the robust revenue growth.
Revenue growth has been a major concern among investors since the initial public offering, leaving them to question if the company can make money off its massive 1 billion members.
Immediately following the Q4 earnings release after the close Wednesday, shares slumped more than 9%. Shares ended the volatile after-hours session down some 4% at $29.98. The sell off continued Thursday with FB shares down 3.52 % in early morning trading.
Shares had gained some 60% since November, but it looks like the Facebook stock rally for now may be over.
A Deluge of Facebook Stock Downgrades
A number of analysts grew cautious after the company announced it will increase spending this year on a cache of new initiatives, with heavy focus on improving mobile experiences for Facebook users. Concerns are that a heavy spending spree on research and development will cut into profit margins.
- Jefferies Group Inc. ( NYSE: JEF) analysts Brian Pitz and Brian Fitzgerald trimmed their rating on Facebook to a “Hold” from a “Buy,” and in a research note wrote, “We are downgrading…as management warns of significantly higher expense levels in 2013 as a result of aggressive hiring and investment plans. While we are broadly supportive of Facebook’s longer-term strategy, the material increase in 2013 spending pressures valuation, making the stock less attractive to own on a near term basis, in our opinion.” The duo reduced their price target on shares to $30 from $32.
- Citigroup Inc.’s (NYSE: C) Neil Doshi slashed his rating on FB from a “Buy” to a “Neutral.” The analyst wrote, “We view FB as a core long-term “net stock.’ But with plans to invest heavily in the biz in 2013, and little expected contribution from new initiatives like Gifts or Graph Search, we don’t see any near term catalysts for the stock. And Mobile Ads appear to be cannibalizing Desktop, which further concerns us.”
- BMO Capital (NYSE: BMO) analyst Daniel Salmon lowered his rating to “Market Perform” from “Outperform.” His target is $32.
- Stifel Nicolaus (NYSE: SF) analyst Jordan Rohan cut his rating from a “Buy” to a “Hold” citing concerns about compression from recent investments and potentially reduced growth prospects from some initiatives, like Gifts.
- Cowen Group Inc.’s (Nasdaq: COWN) John Blackledge maintained his “Neutral” rating, but lowered estimates “to reflect lower expected desktop and mobile advertising revenue and higher expected costs largely in 2013.”
The Biggest Concern of those Investing in Facebook
In attempts to reclaim its position as a $100 billion company, Facebook has been moving quickly on its mission of morphing into a truly mobile business, a transition that began in earnest mid-2012. The social network behemoth kicked-up its online advertising services over the past several months, with a greater emphasis on mobile ads.
Mobile business accounted for 23% of total ad revenue in the fourth quarter, up from 14% in the third.
Mobile monthly active users totaled 680 million, a 57% increase over last year. The surge in mobile users highlights Facebook’s urgency to monetize its growing member count in this explosive arena.
Facebook’s app is the most popular in the United States, accounting for an impressive 23% of all U.S. app use. The social network also held the top spot in the U.S. in mobile display advertising revenue in 2012, with 18.4% of the market, eMarketer reports.
But that popularity and No. 1 position comes with a price and a predicament.
Mobile advertising doesn’t generate as much money as ads that pop-up on PCs and laptops. In addition, garnering user attention on a much smaller screen is difficult.
In a world that is always plugged-in, online and on call, Facebook’s challenges of keeping users engaged without turning them off with a deluge of ads is a daunting task, one that will be a concern of those investing in Facebook this year.
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