Of all the cloud’s biggest players, Facebook Inc (NASDAQ:FB) would seem to have the weakest hand when it comes to generating the billions of dollars each quarter needed to continue building out its data centers.
Google and Microsoft Corporation (NASDAQ:MSFT) also sell software, and file space, on their clouds, and have large app stores. Apple Inc. (NASDAQ:AAPL) began building clouds to serve its own app store, which brought in $7 billion during the last quarter alone.
What FB stock does is sell advertising, much of it aimed at teenagers. It is as dependent on advertising as critics say Google once was, but with less intention of changing. Small surprise then that when Facebook decided to build its own cloud centers it launched the Open Compute Project to make this simpler and cheaper.
Going into earnings on May 3, many were expecting Facebook’s deft advertising business to push non-GAAP net income of $1.12 per share on revenues of $7.85 billion. Heck, some whispers saw the number going to $1.21 per share!
Facebook announced that it is no longer reporting non-GAAP figures, however, so it’s understandable that many people were initially dismayed by Facebook’s $1.04 in per-share earnings … but that beat the GAAP figure of 87 cents by a mile. FB beat beat on revenue, too, at $8.032 billion.
The initial trading reaction was to treat it as a miss, with FB stock falling to $149.90 within minutes of the earnings release. Bears will take notice of the reported expenses, $4.7 billion, against $3.3 billion a year ago. Bulls will note that operating earnings were still up 66% over a year ago, revenue gained 49% and expenses saw a 40% YoY gain. Capital expenditures, meanwhile, came in at $1.27 billion.
Also, the company said it would no longer break out mobile users, as mobile is now the norm. Monthly active users are now at 1.94 billion and daily active surged to 1.28 billion during March, up 17% and 18%, respectively.
After dropping in initial trade after the numbers came out, FB stock rebounded back over $152 per share as investors saw the initial miss as a buying opportunity. As of this writing, Facebook shares are down 1.85%.
The Future for FB Stock
Facebook can continue to grow, but what you want to watch, if you’re worried about its 50% profit margins in 2016, is how much of the work is being done by algorithms and how much is being done by people.
On the one hand, hope lies in making Facebook a marketplace, which is the name of its Craigslist competitor. Marketplace features self-service ads and improved search capabilities.
On the other hand, market research can scale somewhat and bring in cash. Its war against “fake news” can scale somewhat, but it lacks its own business model beyond protecting what Facebook already has.
Hiring 3,000 more people just to manage posts on top of 4,500 already doing it? Policing in this way does not scale at all.
Computer analysis may also allow Facebook to scale its solutions, but it can also be used to attack the company, as with a recent study, leaked to the media, showing that the code of its male engineers has it easier than the code of its female engineers. Code should be code, talent should be talent; but as Silicon Valley is increasingly attacked as a white bro’s club, the legal risks (and costs) are bound to escalate.
Facebook is becoming a lot more interesting to watch, but the Chinese saying, “May you live in interesting times” was a warning, not a recommendation.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in FB, GOOGL, MSFT, AMZN and AAPL.