Facebook Shares Hit New Lows as Concerns Linger
First Published Friday, 27th July 2012 04:32 pm - © 2012 Dow Jones
--Stock hits lowest level ever
--Investors reject report of slowing sales growth
--Smartphone use accelerates as ad sales fail to keep pace
(Updates with additional details on company valuation, mobile revenue opportunities.)
By Drew FitzGerald
Facebook Inc. (FB) shares on Friday traded at their lowest levels ever as the company continued to struggle to convince investors it can leverage its immense popularity, especially on mobile devices, into stronger revenue and profits.
In its first quarterly update as a publicly traded company, Facebook reported its slowest revenue growth in at least a year, a tripling of its costs and expenses, and a decline in some levels of user activity. Also, the company offered few specifics on future results and how it plans to profit from users spending more time on mobile devices, a trend that has threatened the social network's profitablity.
"The lack of guidance and the well-publicized shift to mobile is weighing" on Facebook shares Friday, Oppenheimer analyst Jason Helfstein said. "Additionally, the company provided commentary suggesting higher [third-quarter] expenses."
For its part, Facebook said it remains confident in its prospects, especially on mobile devices.
"Mobile is a huge opportunity for Facebook," Chief Executive Mark Zuckerberg said on the company's earnings call Thursday. "Over the next five years, we expect 4 or 5 billion people to have smartphones. That's more than twice as many people as have computers today."
That trend represents both an opportunity and a risk to Facebook, which ended the quarter with 543 million active mobile users, up 67% from a year earlier. Revenue from those devices has failed to keep pace with usage because the company only started selling significant amounts of advertising on the smaller screens in June.
Still, about half of the $1 million a day that Facebook made from sponsored ads on its News Feed came from mobile devices.
"We're investing very heavily in improving our mobile apps," Mr. Zuckerberg said, adding the company is just "beginning to demonstrate that we can advertise effectively within the mobile experience."
Investors are less certain. Facebook shares, which hit a low Friday of $22.28, recently fell 14% to $23.03, valuing the whole company at $63.1 billion. Both are now 39% below the $38 stock price and $104.1 billion valuation from Facebook's initial public offering.
"Facebook's messy IPO and poorly-received quarterly debut as a public company," Wedbush Securities analyst Michael Pachter said, "will likely keep some investors away from the stock for the time being."
Many who thought the IPO was overpriced now think the subsequent selloff has gone too far.
"It's as if the market didn't bother to do any fundamental analysis prior to the IPO," said Brian Wieser, an analyst with Pivotal Research Group. "There's nothing new in this." Wieser has never changed his initial price target of $33.
In the second quarter, Facebook's revenue rose 32% to $1.18 billion, but that was the company's slowest growth rate since the first quarter of 2011. The Facebook story in the second quarter "was all about mobile growth and its negative near-term impact on monetization," Needham & Co. analyst Laura Martin said.
That impact showed up in the company's revenue from payments and other fees, which Facebook typically generates by taking a cut of purchases of virtual goods sold by Zynga Inc. (ZNGA) and other app developers. Facebook has failed to grow those payments for the past three quarters, partly because users generally don't make such payments on mobile devices.
Also of concern was a decline in a key measure of user engagement. The number of daily average users as a percentage of monthly average users fell 60 basis points to 57.8%, its first such drop in a couple of years.
"This may raise concerns for some about overall engagement levels on Facebook," J.P. Morgan analyst Doug Anmuth said. Overall, Facebook's monthly active users grew 29% from a year earlier to 955 million--but were up just 6% from the prior quarter.
Meanwhile, Facebook's costs and expenses nearly tripled from a year ago to $1.93 billion, mostly because of $1.3 billion of stock-based compensation and related payroll expenses. The company said that in the second half of 2012, it expects operating expenses--excluding stock compensation--to continue to increase significantly and at a slightly higher growth rate than in the second quarter.
"While we ultimately believe Facebook's business model should support attractive operating margins, at this early stage of our growth, investment is a top priority as opposed to managing for a target margin," Chief Financial Officer David Ebersman said. "Therefore, you can expect us to continue an aggressive pace of investment in [research and development] and infrastructure in particular."
Investors will focus next on the mid-August expiration of rules barring company insiders from selling some of their Facebook shares, a risk that could push the stock down further, depending on how executives act.
"Facebook shares movements could disconnect from operating performance in the near term as lockup expirations become a focal point for many investors," Mr. Anmuth said.
Despite the decline Friday, Facebook still has its supporters, who point to the site's popularity and the company's intention to improve its mobile business.
"The company's user base currently comprises the third-largest country in the world," Wedbush's Mr. Pachter said, "and its emphasis on mobile platforms suggests to us that it can become the largest country in the world in a matter of years. Facebook has immense value, which may not be readily apparent from its near term earnings, but which is substantial nonetheless."
Write to Drew FitzGerald at firstname.lastname@example.org
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