Following Wednesday night’s earnings release, Facebook (NASDAQ:FB) is trading up mildly this morning. That’s a bit of a surprise, considering that around last quarter’s report in January we saw a roughly 15% move down in Facebook stock across five days. Before that, in October, investors saw a 20% jump in FB across five days.
Some traders might think this improved stability is a good thing. But frankly, they should be worried — because Facebook stock is at best stuck in a rut, and at worst in for a tough year or two.
Here’s why the social media titan is unlikable after earnings:
Earnings Miss: The company fell slightly short of expectations on earnings thanks to big-time spending on things like developers and server space. Ultimately, you have to spend money to make money, and companies like Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) wouldn’t be dominant if it wasn’t for innovation and a decent R&D budget. However, Facebook’s development efforts haven’t borne fruit — Graph Search was a fad, Poke is a poor man’s SnapChat and Home is plummeting in the Android store. Not exactly a lot of successes despite the expense.
Mobile Math: Profits aren’t the big story, of course. Revenue — specifically, mobile revenue — is the name of the game as Facebook looks to migrate users away from desktops and onto tablets and smartphones. However, the most telling stat in the entire earnings release to me was that while 70% of monthly active users were on mobile (751 million of 1.1 billion total), that mobile segment generated only 30% of all ad revenue. That math is not in Facebook’s favor.
Margin Collapse: The deflationary mobile market isn’t unique to Facebook; media companies from Google to Yahoo! (NASDAQ:YHOO) face the same challenges. But that’s no excuse to pretend that simply growing mobile users is enough when margins are clearly feeling the pain. Operating margin dropped to 26% from 36% and isn’t likely to rebound substantially any time soon. And a look at this graphic of average revenue per user shows not just a decline, but a paltry $1.35 in ARPU.
Facebook Fatigue: Remember that AP/CNBC poll a year ago that said more than half of users have never clicked on a Facebook ad? Facebook is trying to change that, but a revamped News Feed or tweaked design can only trick users so many times. And beyond disinterest in advertisements, consider that Nielsen reports 10 million users have dropped Facebook in the U.S. over the last year. Not encouraging.
Stuck in a Rut: I believe there’s a clear floor of $25 for Facebook stock, since the social media company has mostly traded between $25 and $30 since Thanksgiving. But FB is right in the middle of that range now, and it’s unlikely to break out without a significant, game-changing event. Remember, Facebook stock offered at $38 but hasn’t even come close to the mid-$30s since its IPO flop. If you own FB and it hits $30 or higher, I would sell.
- Facebook earnings: A split decision. (InvestorPlace.com)
- The official Facebook earnings release. (FB Investor Relations)
- A great recap of slides from the FB earnings presentation. (Tech Crunch)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.