Facebook Inc's Blowout Earnings: Why Aren't Investors Elated?

After announcing outstanding results, the social media king is only moderately awarded.

Apr 24, 2014 at 1:30PM

It's difficult to find much wrong with Facebook (NASDAQ:FB) today, after it announced financial results that were simply off the charts. Across the board, CEO Mark Zuckerberg and team are firing on all cylinders, and a significant Facebook share price pop is warranted, to say the least.

However, investors aren't showing Zuckerberg and team much love, despite its stellar quarter. Apple knocked its own fiscal 2014 Q2 out of the park, and based on its 7.5% share price jump in early trading, its getting rewarded accordingly. Facebook? After some positive, after-hours trading that pushed shares up as much as 4.3%, Facebook has since settled into a flat, uninspired, trading range. Apparently, blowing the financial doors off wasn't enough for Facebook investors.

A few specs
The reasons for the initial good tidings were many, and varied, as Facebook exceeded even the most aggressive analyst expectations. On a non-GAAP (excluding one-time items) basis, analysts had predicted Facebook would double 2013 Q1's $0.12 a share. Sorry to disappoint, but Facebook didn't just double per share earnings, it reported $0.34 a share, nearly three times last year's first quarter results.

Facebook's outstanding bottom line was the result of a huge improvement in quarterly revenues. In Q1 2013, Facebook generated $1.46 billion in sales: not bad, but it pales in comparison to the $2.5 billion Zuckerberg and team cranked out in Q1 of this year, a 72% increase. As impressive as both the top line and bottom line results were, it could be argued those pale in comparison to what Facebook was able to accomplish on the mobile and operating margin front.

As Facebook continues to focus on utilizing its treasure trove of user data to better target its ads, advertisers are more than willing to ante up more for each ad. Not only does this approach to marketing result in a better user experience by not inundating us with ads, Facebook's ability to charge more for less translates to higher margins. Facebook fans certainly got that in Q1. On a non-GAAP basis, Facebook's operating margin jumped to 55% from 2013's 39%.

Mobile rules
The big news from Facebook's earnings announcement is the success it's enjoying in all things mobile. As noted in a recent article, though Facebook's primary digital advertising competitor Google (NASDAQ:GOOG) (NASDAQ:GOOGL) retains its title as king of mobile ads, its grip on the top spot is slowly but surely slipping, and Facebook is to blame.

For the first time, Facebook cracked the one billion mobile monthly average users (MAUs) mark as of March 31, reporting 1.01 billion people accessed the site via mobile devices last month. That's a 34% improvement over last year. More importantly, all those Facebook mobile MAUs are converting to revenue. In 2014's Q1, Facebook generated nearly twice the revenue from mobile ads as it did in the year prior: 59% compared to 30% in 2013.

Of the estimated $31.45 billion in mobile ad spend expected this year, according to data from eMarketer , Facebook and Google combined own two-thirds of the market, and that's expected to grow. Google still reigns supreme with approximately 50% of mobile ad spend, but Facebook is coming on strong: as its recent quarter confirmed. How strong? In 2012 Facebook accounted for about 5% of mobile ad spend, that jumped to 17.5% last year, and eMarketer predicts that will rise to nearly 22% in 2014. Facebook's piece of the mobile ad pie will reduce Google's share to below 46% this year, and don't expect that trend to change anytime soon.

So, why the apathy?
The only thing remotely negative from Facebook's earnings call came from COO Sheryl Sandberg. Many of us have been intrigued by the impact video ads, the monetization of Instagram, and Facebook's new mobile ad network will have on revenues. But according to Sandberg, the new revenue sources are still in the "experimental phases," so investors shouldn't expect much from any of the above in 2014. Some analysts had predicted Facebook would garner as much as $1 billion in revenue from video ads alone this year.

Could Sandberg's message be at the heart of investor's apathy following Facebook's blowout quarter? It must be, because there is way too much to like, and way too little for even Facebook naysayers to complain about after its Q1, to warrant little to no jump in stock price. But that apathy, especially after a quarter like that, means Facebook is an even better long-term growth opportunity.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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