It's pretty clear that investors were less than impressed with Facebook's (FB 3.77%) Q4 earnings announced last week. Sure, revenues, earnings, active users, and most everything else grew significantly compared with the prior year, at least on a non-GAAP basis, but concerns obviously linger.
Along with positive growth in several areas, Facebook also saw a dramatic increase in costs, with pressure on margins as a result. But the jump in expenses was only part of the reason for Facebook's share-price drop after announcing results. Slower-than-expected mobile ad revenues, along with Facebook CEO Mark Zuckerberg's plans for spending in 2013, also put a damper on things.
A quick recap
On a quarter-to-quarter basis, Facebook's change in accounting relating to when revenue is recognized skews comparisons between Q3 and Q4. With two full years of transaction information now available, Facebook began recognizing revenue when a transaction occurs, not when payment is received. So for Q4, that meant four months of revenue, versus three months in prior quarters.
With that said, on a year-over-year basis, Facebook made big strides in several areas. Facebook's gross revenue in 2012 totaled nearly $5.1 billion, a 37% jump from the prior year. Net income on a non-GAAP basis -- accounting for some significant one-time expenses, including $1.1 billion in share-based compensation in Q2 2012, and increased R&D costs for the year -- was up 6% to $0.53 a share.
Facebook's closely watched monthly and daily active user totals also improved, to 1.06 billion and 618 million, respectively. Even more impressive is Facebook's successful shift to mobile computing. As Zuckerberg put it, "In 2012, we connected over a billion people and became a mobile company." And it did. Of Facebook's 1 billion monthly active users, 680 million of them are mobile.
The continued growth in Facebook users is good to see, but transitioning all that activity to revenues is where the rubber meets the road. And for some analysts, the $306 million in Q4 mobile ad revenues -- representing 23% of all ad sales for the quarter -- was disappointing. Apparently, $350 million of mobile ad revenues was expected for the quarter.
For the year, capital expenditures jumped a whopping $500 million from 2011, and according to guidance from Zuckerberg and team, Facebook is expecting expenses to jump by 50% this year, well above most analyst expectations. That, along with the "disappointing" mobile ad revenues, is being cited as the reasons for Facebook's share-price decline.
Now what?
The market is a fickle place, and Facebook's drop in stock price since announcing Q4 and 2012 annual results demonstrates it. Need proof? Look no further than Amazon.com (AMZN 0.87%). Though the market reacted negatively to its earnings report last week, Amazon.com didn't get punished the way Facebook has. Why? Because investors recognize that Amazon.com's bottom line is affected by its commitment to building distribution centers, which, according to CEO Jeff Bezos, will help lower costs and improve margins. Makes sense, and investors have been fairly patient while Bezos does his thing.
Facebook hasn't been afforded the same courtesy as Amazon.com, which is both good and bad for investors. Bad, because current Facebook shareholders are being stung by share-price pressure. Good, because Facebook, particularly with a price below $29 a share, offers mid-term investors significant growth opportunity. Even one of the analysts who was "disappointed" with mobile ad revenues, has an "overweight" rating on Facebook, and a target price of $38.
But what about those expenses, you ask? At this stage in Facebook's business life, not using its positive operating income and $2.38 billion in cash to invest in new technologies, people, and revenue opportunities would be a concern. And Facebook has several recent, or pending, introductions that should have mid-term investors feeling good.
By now, you've probably heard about Facebook's new gift card, in addition to its Gifts service. Are these game-changers? No, but finding more ways to expand Facebook offerings, generate revenues, and engage users are positives in the long run. And let's not forget what Zuckerberg called his "new pillar of our ecosystem" on Facebook's recent conference call -- its new Graph Search. That, too, will take time before it begins making an impact on Facebook's bottom line, but that's to be expected, not dismissed.
Perhaps the most immediate impact will be made by the 10 new games, all targeting the hardcore Call of Duty-type gamer crowd, expected later this year. The action-game industry offers a ton of potential; Call of Duty alone finished 2012 by surpassing $3 billion in sales. Facebook's partnership with social-media game maker Zynga, with its Farmville and similar middle-of-the-road games, is fine, but action is where the revenue is. Keep a close eye on these new games as they roll out this year.
Now that 2012 is behind us, it's time to look forward. And if you're a mid-term investor in search of a solid growth opportunity, Facebook still looks pretty darn good.
