Facebook Inc. Under Pressure for All the Wrong Reasons

There’s a lot to like about the king of social media, despite delayed revenue from video advertising and poor results from others in the sector.

May 7, 2014 at 2:05PM

When Facebook (NASDAQ:FB) reported first-quarter earnings late last month, even the most bearish of bears had a hard time finding anything negative to justify their ill will. Revenues exploded compared to Q1 2013, jumping from last year's $1.46 billion to over $2.5 billion in 2014. Facebook's income from operations nearly tripled, as did net income. Margins also improved dramatically, along with the number of Facebook's mobile monthly average users (MAUs), a longtime emphasis of CEO Mark Zuckerberg.

The improvement in MAUs, both mobile and desktop, may have been the most impressive figure of all considering the sheer number of users already on Facebook. Why then has Facebook's share price steadily declined from $63.03 a share the day before earnings were announced, to Tuesday's closing price of $58.53 per share? The answer may lie in part to the poor performance of Facebook's ugly stepchild, Twitter (NYSE:TWTR), and one of its own executives. But don't judge too harshly, turns out she was right.

The Twitter effect
It's more than a coincidence that Twitter's share price has followed the same path as Facebook's since late April, though its drop has been more dramatic. On April 22, the day before Facebook announced its earnings, Twitter shares were at $45.95. By the close of trading on Tuesday, Twitter's stock price had nosedived to $31.85 per share.

By most accounts, the reason for Twitter's stock price demise was its slowing user growth. Other than a spike in Q2 of 2011, Twitter has dealt with declining user growth for the past three years, which is especially disconcerting for tweeters considering its suffering a lack of growth even though its not even a fourth Facebook's size. Yet, despite all of that, Facebook shares seem to move – though not as drastically – in line with Twitter, and vice versa. No, it doesn't make any sense fundamentally, but as many a Fool knows, in the near term the market doesn't always move based on fundamentals.

She said what?
While there's little to no logical reason for the effect that Twitter's stock price movement seems to have on Facebook, COO Sheryl Sandberg's comments following the Q1 earnings announcement were legitimately concerning to some. Facebook investors have been anxiously awaiting the advent of video ads and the monetization of Instagram but, according to Sandberg, they'll need to wait a while longer.

Sandberg's attention-getting statement that investors shouldn't expect much from Instagram or video ads in 2014 was, as one analyst described it, "probably be the most disappointing statement to come out of the call." And he was right. Like many, I continue to be bullish on Facebook in part because of the incredible opportunity video and Instagram present for continued long-term revenue growth. But as Sandberg put it, "[W]e move slowly and deliberately in monetization."

This too shall pass
Based on a recent blog post, turns out Sandberg wasn't just tempering analyst's expectations, as many companies do when sharing earnings guidance. Significantly enhanced video metrics capabilities, Facebook recently announced, are being tested and should be available to advertisers soon. The new and improved video metrics will give advertisers a more comprehensive look at how, and how long, users view an advertisers spot.

Imagine how valuable it would be for advertisers to know how long potential customers were engaged with a video, and at what point they began to lose interest, let alone the sheer volume? A large number of drop-offs at a certain point in a video will help marketers tweak future ads for better results. Clearly, Sandberg was right; Facebook isn't quite ready to present video ads to the marketing world yet.

And there's a lot riding on getting video right the first time, whether it's on Facebook or Instagram. Some industry pundits suggest Facebook will charge as much as $1 million a day for a video ad, so it's no wonder marketers will demand to know what their return on investment is, and video metrics will do that.

Final Foolish thoughts
It makes no sense for Facebook's share price to move as Twitter's does; the only thing the two have in common is their industry. As for video ads and monetizing Instagram, which in many respects is one in the same, Sandberg's right about not rushing. Just like many a Foolish investor, Facebook is focusing on the long term, just as it should.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook. 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.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

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

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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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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