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.
Facebook now below $25, down over 9% after hours. After Zynga yesterday, is this the closing of the internet IPO window?—
Tim Bradshaw (@tim) July 26, 2012
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.