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

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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  • Report this Comment On April 24, 2014, at 2:10 PM, JinIndiana wrote:

    I don't think it's the case that these video ads are "experimental." I think it's the case that they are ineffective on a large scale.

    Neither Instagram nor Video ads have any logical reason to delay them IF they are lucrative. They already have the technology in place.

    Thus, a reasonable conclusion for the delay is that they really are not that lucrative.

    Regardless, FB has a major uphill climb for Q2 once the comparables get really difficult AND they have the share dilution of Whatsapp and Oculus to account for.

    Also, the use of non-GAAP for FB is shady. GAAP should be the standard, because the so-called "one time" expenses are not. Yes, buying Oculus is a one time expense. Buying a company is not. Neither is employee compensation using shares.

    All of those are being ignored in the non-GAAP "adjustments."

    I'm short FB through this year.

  • Report this Comment On April 24, 2014, at 2:13 PM, JinIndiana wrote:

    I'm short FB now and through this year because I think it can never deliver on the hype.

    The comparables have been soft thus far, and the use of non-GAAP is inappropriate and being abused.

    Buying Oculus may be one-time, but one time and infrequent are not the same, and buying a business should be included because for FB in particular it is not one-time.

    Q2 is really going to hurt FB-- the comps are hard, the growth is already slowing, and there's the added whammy of the 10% share dilution to come.

  • Report this Comment On April 24, 2014, at 4:24 PM, gorillashark wrote:

    > "Neither Instagram nor Video ads have any logical reason to delay them IF they are lucrative. They already have the technology in place."

    This is a stretch, since Facebook explained their reasoning for both during the call.

    Instagram monetization is being held back because FB is treating Instagram as still being in its growth phase, and they don't want to slow it down.

    Autoplay video ads are being held back because they want to increase organic video publishing first, so that autoplay videos in feed are common for users when more of this type of ad come around (so as to not turn off users from the concept of autoplay videos).

  • Report this Comment On April 24, 2014, at 9:03 PM, astephan2525 wrote:

    Personally, among my circle of US and international friends, I find that people are using facebook way less than they used to. The shine has simply warn off and people have gotten sick of it. I’m not sure if that’s showing up in any of the statistics however or if facebook is letting it show up. There are probably still areas of the world where facebook is expanding rapidly, but at least in the US it seems to have lost it’s luster. Logging in and doing the same thing every day for a period of five or so years, seeing to the same people spout their mouths, gets old. I suppose this is the “MySpace” argument.

    However, the marketing departments who are pouring money into advertising on facebook may not be completely aware of this yet. They were probably a bit behind the curve and reluctant to switch into social media advertising to begin with. I’m afraid they are jumping on the boat when it’s already sinking. I think it’s clear that Zuck and company see this risk and it’s one of the reasons why they are paying huge money to buy the “next cool thing”... Instagram, WhatsApp, Oculus, etc. I live in Japan and here I would say that the LINE app has already become more popular than facebook. LINE is essentially the Japanese equivalent of WhatsApp. If we are in a kind of tech bubble it must be said that social media is at the very forefront of that bubble. The excitement that facebook and twitter have created by better connecting people is the same excitement that’s driving the markets. So when this bubble comes to an end I fully expect facebook to lead the correction. I believe it’s only a matter of time before the excitement wears off and it starts showing up in the numbers. From what I understand teenagers abandoned facebook long ago.

  • Report this Comment On April 25, 2014, at 2:50 AM, youngblood58 wrote:

    There also seems to be a lot of skepticism around so-called momentum stocks right now. Apple is not a momentum stock, so comparing the two companies is not appropriate.

    I still think FB is a solid investment (for now), but there is no doubt that questions remain around acquisitions and the efficacy of online advertising.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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