Wall Street Gives Facebook the Skunk Eye
A jump in advertising revenue and promises to keep investing in its growth weren't enough to reassure Facebook investors, who dumped shares even as the company beat expectations with its latest earnings report. The path to Wall Street happiness will be a lot smoother when the top social network puts a stronger mobile strategy in place.
02/01/13 3:01 PM PT
Facebook's rise in overall ad revenue helped the company beat Wall Street expectations on its quarterly earnings, but promises from the company to continue spending heavily in hiring and new initiatives kept investors from sending the stock price soaring.
The company reported this week that its overall revenue increased 40 percent to US$1.59 billion, compared to the $1.13 billion from the fourth quarter of 2011. Facebook's net income dropped, however, falling to $64 million compared to $302 million from the same time a year earlier.
The social network's overall ad revenue increased 41 percent to $1.33 billion on the quarter. Mobile ads accounted for 23 percent of that total, for $153 million in revenue, up from the 14 percent of total ad revenue mobile earned in the third quarter of 2012.
The mobile space is particularly important for Facebook, as many of its more than one billion users are turning to their smartphones and tablets to interact with the site. The company has recently tried new ways to increase its mobile presence, such as revamping its mobile messaging service and bolstering its location-based features.
CEO Mark Zuckerberg went so far as to call Facebook a "mobile company" in a conference call following the earnings release.
Facebook did not respond to our request to comment for this story.
Investors Not Impressed
Overall, the company's earnings beat most Street expectations, yet investors still seemed hesitant about the social network. Facebook's stock slipped more than 6 percent on Thursday morning following the earnings release. It settled around $30 by the day's close and continued to hover around that price going into Friday afternoon.
At that price, it's still higher than its lowest close of $17.55 per share from last fall, a steep drop from the $38 IPO price last May. Since its debut on the public market, the company has struggled to convince investors that it can sustain growth in the relatively uncharted social space.
Facebook is currently investing heavily to ensure that growth. The company spent $1.06 billion in costs and expenses for the fourth quarter, an 82 percent increase from the same time a year earlier. During that time, Facebook launched initiatives such as Graph Search and e-commerce push with Facebook Gifts.
Zuckerberg said in the earnings conference call that aggressive investments to grow out the social network would be the main goal for the coming year, rather than efforts to maximize profit.
Those efforts might very well pay off down the line, but Wall Street is hesitant about putting all its cash into a company that might not produce a sky-high profit next quarter, said Brian Carter, Internet marketing expert. The more conservative investors know the site has ample competition and a tough job ahead of it with monetizing its mobile presence, and are waiting for Facebook to prove that it can.
"I suspect that because Facebook is something new that not even the digital folks have seen before, the conservatism of Wall Street keeps it from going all in," Carter told the E-Commerce Times. "Google is the eldest son, who benefits the most from the last-click bias of our analytics; Facebook is the younger son but with perhaps greater potential. I get the sense that Wall St. is holding back saying 'Okay, let's see what you're made of.'"
In It for the Long Haul
Eventually, that question could have a very positive answer, said B. Thomas Varghese, CEO and founder of eBiz Universe, a social media agency based in Chicago.
"Facebook will be generating huge revenues in the long term," Varghese told the E-Commerce Times. "They have a one billion-strong user base and it's only a matter of time before they figure out how to monetize that user base. They need to be focused on the long term and that's what it sounds like they're doing."
Facebook could be compared to Amazon, which prepared for a sustainable future as other Internet startups were going bust in the dot-com era, Varghese added. The online retailer came out a winner by predicting where the market was headed and making sure it had a presence there.
In Facebook's case, the market is headed towards mobile, and the company is making substantial efforts to prove itself in that space, said Brian Wieser, analyst at Pivotal Research Group. The company's gains in the space haven't been revolutionary, he noted. Advertisers are largely heading towards mobile more because Facebook offers bundled desktop and mobile ad deals.
"In a sense, Facebook flipped the switch to make this happen," he told the E-Commerce Times. "They engineered a product that allowed advertisers to be indifferent and which allowed Facebook's ad operations team to automatically determine where to run ad units. By offering mobile and desktop units for its NewsFeed as part of one undifferentiated bundle, Facebook ultimately produces and controls more ad inventory. This makes it easier for Facebook to chase a bigger share of the wallet than it might otherwise pursue."
Given that positive course, investors who aren't expecting huge payouts on their Facebook stock anytime soon should hang on to their shares, eBiz Universe's Varghese said.
"Facebook is coming up with innovative and beneficial approaches for businesses to promote themselves," he pointed out. "So I think in the long term they are a winner and if any investor is for the long term, they will definitely stick with Facebook."