Facebook's First Earnings Report Could Be a Huge Disappointment

Facebook (Nasdaq: FB  ) may not enjoy the 8.7% sequential revenue growth most analysts say it will when the company reports second-quarter results later this month. History says sales could instead fall by 3% or more.

Wait. What?
I'll understand if that raises some eyebrows. Those of you who've read my columns for a while know I'm generally positive on Facebook. You also know I'm also encouraged by a budding ad platform called Facebook Exchange, which uses browsing data to make display advertising more targeted.

So when fellow financial writer Erik Sherman of CBS Money Watch found that the social network was attracting even fewer unique visitors per month than had been initially reported by Reuters, I was curious but not overly concerned. Instead, in an interview, I promised to take a closer look at Facebook's growth strategy before passing judgment.

Well, Fool, I've run the numbers. They aren't good:

Quarter

Total Revenue

Sequential Growth

Average Unique Visitors

Sequential Growth

Q1 2012 $1,058 million (6.5%) 160.392 million (2.69%)
Q4 2011 $1,131 million 18.6% 164.831 million 1.44%
Q3 2011 $954 million 6.6% 162.495 million Not calculated

Sources: SEC filings, comScore, and TMF estimate.

Predicting underperformance
While it's not perfectly symmetrical, and we're very early in the public history of Facebook, there appears to be a correlation between unique visitors and revenue growth. More eyes equal more dollars, just as it is with its main digital-advertising rival: Google (Nasdaq: GOOG  ) .

Through the first two months of the current quarter, comScore data shows that Facebook was attracting 158.354 million unique visitors per month. What happens if those figures hold? Average visitors would decline about 1.3%. Not good. As you can see, the last time UVs declined sequentially, the social network saw revenue fall more than 6%.

This time, a 3% drop seems more likely. Why? Again, refer to the math in the table. Facebook seems to be on track for a 1.3% sequential decline in unique visitors during Q2. That's about half the decline the social network saw in the first quarter, when revenue declined by 6%.

A 3% drop would keep with the limited amount of historical data we have to this point, which means Wall Street's Q2 projection could be off by double digits. Traders would crush the stock in a sell-off.

Why you might not want to cut and run ... yet
To be fair, there's an important bright spot in that table. While both UVs and revenue declined from Q4 to Q1, a little math shows that Facebook did substantially better at generating revenue per visitor in Q1 than Q3, and nearly as well as in Q4:

Quarter

Total Revenue

Average Unique Visitors

Revenue Per Visitor

Q1 2012 $1,058 million 160.392 million $6.60
Q4 2011 $1,131 million 164.831 million $6.86
Q3 2011 $954 million 162.495 million $5.87

Sources: SEC filings, comScore, and TMF estimate.

Here's why this matters. Facebook skeptics have long argued that Facebook's weakness is an unproven ability to generate more revenue per active user (REVPAU). So while Zynga (Nasdaq: ZNGA  ) has seen overall growth in the number of users playing its games, far too many burn out on Facebook and the apps connected to it. REVPAU, in response, goes nowhere.

Or at least that's the theory espoused by those who see Facebook as just another Groupon (Nasdaq: GRPN  ) , which relies on generous merchants and a bottomless pit of new customers for growth.

The reality is more encouraging. As the second table shows, revenue per visitor is up versus six months ago. We can probably expect more volatility in future quarters, but that's also due to the nature of participating in (and, to a large degree, shaping) nascent markets.

You have a friend request waiting
Does that make Facebook a Rule Breaker? Possibly. Either way, it pays to study disruptive technologies such as social media, since, over time, the market rewards those that lead the rebellions. These are the sorts of companies that we look for in our Motley Fool Rule Breakers newsletter service. Want in? Check out a 30-day trial subscription. If that's not up your alley just yet, you can still check out a free special report showing you how to invest in the next trillion-dollar revolution.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Google at the time of publication. Check out Tim's Web home, portfolio holdings, and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services have recommended buying shares of Google. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 05, 2012, at 10:49 AM, TechJunk13 wrote:

    Hey Tim,

    You got the exchange wrong for FB. Its Nasdaq: FB, not NYSE. Please take a look.

    Thanks

  • Report this Comment On July 05, 2012, at 10:55 AM, TMFMileHigh wrote:

    @TechJunk13,

    >>You got the exchange wrong for FB. Its Nasdaq: FB, not NYSE. Please take a look.

    Ugh. Thank you, sir. I've made this mistake more than once, unfortunately. I'll make a reminder note for future pieces.

    Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor

    Web: http://timbeyers.me

  • Report this Comment On July 05, 2012, at 11:38 AM, DCUDFlyer wrote:

    Tim,

    Enjoyed the article. What I found especially interesting was your point on the REVPAU. That was my primary issue with the stock at IPO time - how will this company monetize its insanely large user base?

    Still waiting this one out - but REVPAU is definitely the figure to keep an eye on, IMO.

    DCUDFlyer

  • Report this Comment On July 05, 2012, at 6:21 PM, xetn wrote:

    Only a "fool" would care about FB's earnings.

  • Report this Comment On July 05, 2012, at 6:30 PM, TMFMileHigh wrote:

    @xetn,

    >>Only a "fool" would care about FB's earnings.

    Disagree. Considering its influence, potential earnings power, and client list, a Fool should very much care about Facebook's earnings.

    Thanks for writing and Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor

    Web: http://timbeyers.me

  • Report this Comment On July 05, 2012, at 6:33 PM, mikecart1 wrote:

    Facebook is bound to do the opposite of what the majority think it will. It may not move at all in share price.

  • Report this Comment On July 05, 2012, at 7:45 PM, hank321 wrote:

    Much about FB disappoints, frankly. The firm, the service, the privacy guarantees, the shares, have all been steeply hyped. Too many interests think they have something to gain by pushing FB.

    Many folks doubt it can ever live up to the initial speculation, as the firm's performance is, unfortunately, deeply mired in misleading half-truth.

    A friend asked me if I thought that $28 was a fair entry point. I told him, frankly speaking, I would not be a buyer at any price I had seen.

    There are so many decent opportunities out there.

  • Report this Comment On July 05, 2012, at 7:50 PM, clbjblk wrote:

    I will take the face book any day over a company that feeds off the one's that tried to work out payments only to be degraded and then have a company like some one suggested because they buy collection records for nothing and show a profit, I still believe you pay what you owe . But to make money off of those who tried to work things out and then sell the rights to the Portfolio Recovery stock. I think they should have chose a better name like Polio and then save on the vaccine,but face book can always advertise for them and let the people know what buzzards eat.Does the fool still like this great business or was that just a Lawyers Christmas.

  • Report this Comment On July 06, 2012, at 8:47 AM, mdtopper wrote:

    may not enjoy the 8.7% sequential revenue growth most analysts say it will

    where do "most analysts" get there information? and why do investors listen? use your head. look at the numbers. invest cautiously / wisely!

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