Facebook Inc (NASDAQ:FB) did something new and unexpected in the first quarter: It missed analyst revenue estimates.
FB was expected to bring in $3.56 billion in revenues; instead revenues came in about $20 million lower. This was Facebook’s first top-line miss since 2012, and shares were down a little more than 2% this morning before the bell.
Still, the miss goes to show just how high analyst expectations had become for Facebook stock.
Facebook Earnings Recap
Sales were still up a very impressive 42% over the first quarter of last year. And Facebook was stung by the same currency issues affecting the rest of the tech sector. Excluding the impacts of a rising dollar, Facebook’s revenues would have been up an eye-popping 49%.
Digging into some of the details …
Facebook’s moneymaker continues to be advertising, and specifically mobile advertising. Total advertising revenues for FB were up 46% for the quarter (55% excluding currency moves) to $3.32 billion. And of this, mobile ads accounted for 73% of the total. This time last year, mobile accounted for just 59%.
There was a time, not too many quarters ago, when mobile profitability was a major concern for Facebook stock. No longer. FB is now monetizing mobile users better than any of its competitors.
Looking at earnings, the numbers are a little more mixed. Wall Street expected to see non-GAAP earnings (excluding stock-based compensation and amortization) of 40 cents per share, up from 34 cents in the year-ago period. FB managed to beat that by 2 cents. But in looking at real GAAP numbers, Facebook’s earnings per share actually fell a little, from 25 cents to 18 cents.
The reason behind the drop in earnings: Facebook is spending money like a sailor on leave.
GAAP expenses (which include stock-based compensation) were up by 83%. Research and development more than doubled year-over-year, and marketing and sales expenses came close. This took a massive bite out of margins. Operating margins dropped from 43% this time last year to just 26%.
Facebook’s ballooning expenses are not new. There was quite a bit of grumbling from FB stock holders last quarter about it too, and Zuckerberg’s response could best be described as a nonchalant shrug. He views the money well spent on securing Facebook’s future.
We’ll see. Facebook has made major investments in video and voice-over-Internet calling, but thus far both haven’t made much of an impact on sales. And for all their promise, Instagram and Whatsapp are still mostly un-monetized.
All in all, not a bad quarter, even by the elevated standards that the Street holds for Facebook these days. But what I found most impressive is that FB is continuing to grow its monthly active user base at a 13% annual clip, and mobile monthly active users are growing at a 24% annual clip. The company also boasted 936 daily active users (DAUs) on average in March, representing 17% growth and a large beat of expectations of 920.2 million.
The problem? That kind of growth can’t continue forever.
Roughly half the world’s Internet-enabled population is already a monthly active user, and the stragglers that are left are probably lower-quality users in terms of potential revenue.
Importantly, FB is also squeezing more money out of its existing users. Average revenues per user are up to $8.32 for North American users. This time last year, it was $5.85.
We’ll see if Facebook can continue to get more bang for its buck among Americans and Canadians, but it almost certainly can among its European and Asian users. Average revenues per user in Europe and Asia are a modest $2.99 and $1.18, respectively.
At the end of the day, though, a disciplined investor has to also take stock prices into consideration.
No one can argue that Facebook stock isn’t a standout growth prospect. But FB also is a wildly expensive stock, trading for 76 times trailing earnings and 19 times sales. That’s not completely unreasonable for a company growing at a 42% annual clip.
But you also have to have faith that Facebook can continue to put up those kinds of numbers and that it will keep its expenses under control.
Judging by the premarket reaction, that may be an aggressive assumption.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.