Though nearly every one of the 30 analysts that follow Facebook (FB 0.55%) consider it a "buy" or a "strong buy," investors clearly weren't overly impressed with last week's Q1 earnings release. Facebook stock has pulled back more than 6% since the news, as of this writing. The question is, will Facebook stock continue to slide?
Over the long haul, Facebook analysts' bullish sentiments are warranted. Facebook is coming off a surprisingly solid quarter of user growth, there are multiple growth opportunities waiting in the wings, and video usage is exploding, which will continue to drive revenue growth.
Amidst the laundry list of positive signs, however, lie a few challenges -- as is the case with any company. Will the potential roadblocks cause Facebook's stock to drop? Not likely over the long haul, but they do warrant monitoring.
Show me the money
By and large, analysts -- as well as some investors -- are a notoriously impatient group. That's part of the reason Facebook CEO Mark Zuckerberg is continuously asked about the delivery date for its Oculus Rift virtual-reality (or VR) headset, and the monetization of both WhatsApp and Instagram.
Rumors from just a few months ago indicated that consumers could count on a Rift VR release date later this year. However, it appears Rift may not make it to store shelves in 2015 after all. Oculus founder Palmer Luckey implied at a trade show last month that a rollout of Rift to the masses won't happen until next year.
Zuckerberg also fields a bevy of questions regarding monetizing Instagram and WhatsApp. During Facebook's recent earnings call, Zuckerberg sidestepped both the Rift delivery date and the timing for unleashing Instagram's huge revenue potential. WhatsApp, per Zuckerberg, will be reevaluated after hitting 1 billion monthly average users.
Getting a return on Facebook's many investments is more a matter of when than if. But in the short term, continued delays could put additional pressure on Facebook stock.
Investing in the business
We knew heading into 2015, thanks to Facebook CFO Dave Wehner, that spending was going to continue rising at a torrid pace. For the second consecutive quarter, expenses jumped by over 80%. In Q1, Facebook's overhead jumped to $2.61 billion -- 83% higher than last year -- and that followed an 87% year over year increase in costs in 2014's fourth quarter. And there's more on the way.
Costs associated with the ongoing development of ad measurement tools, internal user analytics, infrastructure investments, and personnel increases are expected to fuel a 55% to 65% overall increase in expenses this year. That's slightly down from the prior quarter's estimate, but not by much.
There's nothing wrong with spending money to make money, as long as investors see a return. Again, not many industry pundits are betting against Facebook's success here, but rising overhead without the requisite return on investment could spell trouble.
It's there for the taking
Like its digital competitor Google (GOOG +0.27%) (GOOGL +0.20%), Facebook makes the vast majority of its revenue from advertising. Both online behemoths generate over 90% of their respective sales from ads. Google's YouTube property in particular boasts some big brand names, which naturally equate to big ad sales.
When COO Sheryl Sandberg was asked about getting big brand names to advertise on Facebook, she was clear that its relationships with small and medium-sized businesses, or SMBs, are Facebook's bread-and-butter. That presents an opportunity, as well as a challenge. As Facebook fans know, it rolled out its video spots to the masses recently, and they appear to be a big success.
Sandberg said that over 1 million SMBs have already used Facebook's video-ad alternative. That's the good news. The challenge -- and the opportunity -- is getting the 30 million SMBs with business-related pages that haven't committed marketing dollars to Facebook onboard. Video is relatively new to Facebook and is probably brand new to many SMBs. To convert the 30 million non-paying SMBs into revenue contributors, Facebook will need to ensure that there isn't even the perception of a barrier to entry.
Are any of these potential roadblocks reasons to sell? No. However, they do represent challenges that investors would be wise to monitor going forward.
