Facebook shares had a double nose-dive today. 7% down in the session and then another 10% fall in after hours trading. Their first quarterly results since the IPO actually came in slightly ahead of analyst expectations with a 32% rise in revenues YOY to $1.18b. But that still means that Facebook’s growth has reduced in each of the last three quarters. A loss of $157m was recorded mainly due to stock compensation costs over the IPO.
Monthly active users climbed 29% to 955m but are pretty static in the US and many other developed countries.
Costs surged from $488m to $1.93b and, as one might expect, margins tumbled.
In our much quoted Feb 12 post – The $100b Facebook question – we commented that Facebook’s skyhigh margins wouldn’t last. Valuations seemed to be based on them staying where they were with meteoric growth eventually justifying the valuation. We suggested that a valuation of $50b was much nearer the mark as eventually even Facebook would be subject to the valuation metrics used for maturer companies. With today’s falls we are getting very close to that. And we still have all that stock in lock down which will flood the market in the next few months.
But, we have become much more bearish on Facebook in the near 6 months since we wrote that thesis. The world is moving faster to mobile (and tablets) than even we had imagined. 57% of Facebook users now access via their mobile. Facebook has no real mobile advertising strategy – indeed, many people rather like the ad-free mobile experience! As we saw with Zynga this morning (which btw represents c12% of Facebook’s revenues) users can be very fickle. See Zynga bodes ill for Facebook. Twitter seems to be the preferred social medium for more and more of the high spending part of the spectrum.
Of course, I am not dismissing the huge value of nearly 1b users. Indeed I have never underestimated the importance of Facebook. What I have never understood is its valuation. Walter Price is the manager of the RCM Technology Trust where I sit on the board as an NED. He was allocated stock in the IPO but sold for a small profit as soon as dealings began. Walter said of Facebook “You can have a great company but it may not be a great stock if the valuation is inappropriate”. This maxim applies to many other companies we report upon – maybe the reason we are industry not stock market analysts!