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Summary:

Facebook reported earnings that met estimates on Thursday, but that wasn’t enough for some investors — who clearly wanted to see the company outperform even the rosiest expectations. Meeting those lofty goals will be a challenge for Facebook in the future, especially as its growth rate slows.

zuckerberg

By almost any measure, Facebook is one of the most successful technology companies of the past half a century or so. It has close to a billion active users, and more than half a billion of them access the giant social network daily — and in just eight years, the company has grown from a tiny startup into a virtual colossus with annual revenues of about $4 billion. Unfortunately for CEO Mark Zuckerberg, that kind of growth creates some fairly astronomical expectations for the future, and on Thursday the company got a quick lesson in what happens when you don’t meet those kinds of expectations, after it released its first quarterly earnings report as a public company.

As my GigaOM colleague Ki Mae reported, Facebook’s results met or exceeded analysts’ consensus estimates for the quarter in most areas: the company reported revenue of just over $1 billion — an increase of 32 percent from the same period in 2011 — and its adjusted earnings were $295 million, right on target with estimates (in strict financial terms, it reported a loss of $157 million, as a result of one-time expenses for stock awarded to employees). And it reported advertising revenue of almost $1 billion, up 28 percent from the same quarter a year earlier. Its user base grew by 32 percent to 995 million.

For investors, meeting estimates wasn’t enough

For any other company, that kind of performance would have blown the doors off and the stock would have rocketed upwards — Amazon reported that its earnings dropped during the most recent quarter, and the stock actually went up. But Facebook’s stock, which is already down substantially from the IPO price of $38, slid by more than 11 percent after-hours to $24.

The biggest problem, as a number of analysts noted in the wake of the earnings report, is that despite the drop since the initial offering, Facebook’s shares are still priced for perfection — trading at a multiple of revenues that assumes dramatic growth for the foreseeable future. It may seem perverse, but with that kind of expectation built into your stock, the only way to keep it from falling when you report your results is to significantly exceed estimates, something other high-growth companies such as Apple have become good at doing.

Many analysts and shareholders probably weren’t even paying attention to the year-over-year numbers — they were looking at the quarter-over-quarter numbers, and some of those looked underwhelming for a stock that is valued so highly: revenue of $1.18 billion, for example, wasn’t much higher than the $1.06 billion that Facebook brought in for the first quarter. And even the year-over-year numbers weren’t all that impressive to many, since they showed that Facebook’s growth rate continues to slow.

Mobile is still a big question mark

It’s also worth noting that Facebook advised analysts during the run-up to its initial public offering that they needed to revise their expectations downwards (something that caused a certain amount of controversy, since that advice was given only to brokerage firms and not to the general public) so in a sense it’s not really surprising that the company managed to meet those revised estimates.

To make matters worse, Facebook reiterated during its earnings call on Thursday some of the bad news that it provided to analysts during the IPO roadshow, including a less-than-positive forecast about its ability to monetize its growing mobile audience.

During his brief comments before the main part of the earnings call began, Zuckerberg said that mobile was one of the key areas that the company needed to focus on. But in the financial part of the call, CFO David Ebersman admitted that the volume of ads that Facebook served in the quarter actually declined in the most recent quarter by 2 percent, because more users accessed the site via a mobile device and the company’s ad program for mobile isn’t fully built out yet.

The bottom line for Mark Zuckerberg is that the stock market has no interest in what you did yesterday, or last year, or how quickly your company grew from a four-man startup in a Harvard dorm room into a globe-spanning colossus. All it cares about is how fast you are growing right now — and even more important, how fast you will be growing in a year or two. If the numbers that you provide don’t exceed those rosy expectations, then you are in a tight spot, and that is where Facebook finds itself today.

  1. great post

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  2. The FB Web site is loaded to the hilt with display advertising and commercial timeline spam, and users are tired of it. Meanwhile an unusable mobile App with absolutely no advertising shows little potential for revenue growth either.

    Facebook started out as a great way to see what your distant friends were up to. Now it’s just a depressing place to get spammed, bored, and ignored.

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  3. And, sorry to post twice, but might I ask… besides the IT staff, which have succeeded in keeping this massively popular site up and running, what the hell have the other 3,000 employees been up to?

    Nothing innovative has come out of Facebook since the Graph, 2 years ago.

    Billion dollar companies have to innovate. Facebook just isn’t.

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  4. Richard Horner Thursday, July 26, 2012

    GOT TO LOVE THE BOOK

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  5. Richard Horner Thursday, July 26, 2012

    THANK YOU I KNOW I GOT MY CAPS ON

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  6. >>By almost any measure, Facebook is one of the most successful technology companies of the past half a century or so.<<

    By almost any measure other than profitability, sustainable advantage, and room for future growth. From basic economics, offer something of marginal utility for free, and demand should be infinite. Business success, however, is not a just popularity contest.

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  7. Guess what – all the new age “experts” including this very site have been hyping FB for years and how it would take Google down and other kinds of nonsense. FB’s business model has always been shaky and now the sheen is coming off. FB will probably live on but make no mistake about it – they are no Google.

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  8. Would be interesting if Facebook started charging users a nominal fee for the web version but made its mobile version free – or something similar. This would ramp up mobile usage and likely yield the revenue expectations they need.

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    1. Don’t you mean the reverse?

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  9. Good post–often people miss that the stock market prices in all knowledge about future growth and opportunities, so if there is no news or no outperformance, there is no reason for the stock price to go up.

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  10. I just lol’d

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