Facebook shares plunge to new lows on Q2 results

Shares trading 40% below the $38 IPO price after the social network's first-ever quarterly report

Facebook's stock has hit a new low after the company reported second quarter results that weren't enough to impress investors.

Shares fell 13% to $23.26 in early trading Friday, well belowthe company's $38 IPO price.

In the quarter ending June 30, Facebook posted a net loss of $157 million, or 8 cents a share, compared to a profit of $240 million, or 11 cents a share, in the year-ago period. On an adjusted basis, earnings came in at $295 million, or 12 cents a share while sales rose 32% to $1.18 billion, meeting consensus estimates of 12 cents a share on revenue of $1.15 billion.  

Of that revenue, advertising grew 28% year-over-year to $992 million, far above the $921 million consensus. Advertising revenue accounts for 84% of Facebook's total sales.  

It is also worth noting is that the company reported that cash and marketable securities grew to $10.2 billion, which includes $6.8 billion in net proceeds from the initial public offering.  

Doug Anmuth, an analyst with JP Morgan, believes that Facebook share drops were due mostly to lock-up expirations. 

"We recognize that Facebook shares movements could disconnect from operating performance in the near term as lock-up expirations become a focal point for many investors, but we believe Facebook is in the early stages of an important transition in its advertising business that should drive accelerating growth and margin expansion over time," Anmuth wrote in a note. "Accordingly, we would view lock-up related weakness over the next few months as a buying opportunity for the long term. We reiterate our overweight rating."

Anmuth has set his Facebook target price at $45.

Oddly enough, Facebook did not report forward guidance on it total year expectations or even next quarter, leaving analysts to continue their own speculation without the company's measure.

 

Anaylsts across the board are lowering their outlook and target prices for Facebook Friday morning. 

Sterne Agee analyst Arvind Bhatia reduced his estimates for Facebook, but continues to believe that Facebook's market opportunity remains large and the stock should be a core holding in tech portfolios with a long-term horizon.  

Lack of forward guidance put pressure on shares, and Bhatia is reducing target to $37 from $46.

"We expect the stock to remain volatile quarter to quarter, Bhatia explained in a note. "We believe monetization could improve meaningfully through greater adoption of Premium Ads and Sponsored Stories, especially their use in News Feeds."

Bhatia also lowered his 2012 EPS and revenue estimates from 56 cents on $5 billion to 48 cents on $4.8 billion. 

User numbers

Facebook said that its monthly active users (MAUs) came in at 955 million, up 29% from 901 million reported in April.

Analysts had hoped to see a number at or above this level for the second quarter.

"Facebook appears to have hit a Fundamentals Air Pocket, given its decelerating MAU growth (27% in ’12 vs. 48% in ’11), we don't want to see any continued softening of this number," wrote Mark Mahaney, analyst at Citi Investment Research, in a note to investors prior to Facebook's report. Mahaney has a $35 price target on Facebook. 

Mahaney wrote that he'd consider MAUs in the 900 million to one billion range as a neutral factor for investors.

Facebook's daily active users also saw a jump from last year, rising 32% to 552 million.

COO David Ebersman explained that Facebook might has also been cracking down on false or duplicate profiles that have been swelling since the expansion of the social site in Turkey and Indonesia. Ebersman stated that they are working to keep their tools on top of the removal of false accounts to ensure better targeted ad results and reduce spam on the site.

Mobile strategy

Mobile MAUs also rose to 543 million, up 10% from the 488 million users that were logging on via mobile device back in April, and up 67% from last year.

CEO and founder, Mark Zuckerberg pointed out in the earnings call that “mobile is a huge opportunity for Facebook,” and that people that use the mobile service are 20% more likely to log in daily, making these people very dedicated users.

Facebook launched several new mobile products this quarter, including a new Facebook Camera app for iPhone, an improved version of the mobile messenger app for both iOS and Android, as well as several updates to the Facebook Android app.   

Facebook also launched global App Center where users can discover relevant apps for both mobile and the Web as well as announced plan for deeper integration with future Apple products and software.

As part of the mobile strategy, Facebook has been doing its fair share of acquisitions and acqui-hires such as its grab of Instagram and the mobile-centric usership base it was built on.

Facebook has also had the challenge of bringing the Facebook experience and advertising with a much smaller screen space.  

Ebersman also explained that payments (digital goods) revenue has remained “essentially flat” due to the transition that users are making to mobile.

This is a part of the problem that Zynga struggled with earlier this week when it reported its quarterly earnings but has not created a fully robust mobile community of people that spent on digital goods. In the coming months, both Facebook and Zynga hope to improve the atmosphere of their mobile platforms so that more people see it as an equally suitable place to game and buy goods.

Zuckerberg even added that the “mobile experience (for Facebook right now) is fairly basic compared to what many people want.” An issue that he thinks the App Store and continued collaboration with Apple and Google will improve soon. 

Advertising revenue

Revenue from advertising, which is 84% of Facebook's revenue, shot up 28% to $992 million. 

Facebook explained that 70% of campaigns resulted in a return on ad spend of 3x or better, and 49% of campaigns showed a return on ad spend of 5x or better.

CFO for the company, Sheryl Sandberg explained to investors, on the earnings call, that social Facebook ads have a 98% better recall than any other ads on the Web and the company will keep encouraging growth in the social ads. Right now just over half of the ads appearing on Facebook are social in nature, meaning that they are tied to things that you or your friends have expressed interest in and involve some type of action to take.

Last quarter, sponsored stories saw 53% more engagement than standard ads, and mobile ads had four times the engagement of Twitter ads.

The latest report from TBG Digital, released last week, stated that the cost per thousand impressions (CPMs) on ads on the social network increased by 58% compared to the same period last year and overall engagement also grew by 11%. This reversed the decline experienced the previous quarter.

While everyone will be combing over the results from Facebook, the company already warned investors before its IPO that Wall Street's expectations were too high and that they should keep the bar of anticipation reachable. 

Now it looks like shareholders are listening.

Acquisitions

With people still curious what the Instagram acquisition can do to change the userbase and experience on Facebook, Zuckerberg reminded investors that the deal has not closed yet and no integration has gone live. He also pointed out that most of the Facebook acquisitions are focused on talent (but it was more than that with Instagram) and the company will continue to seek out companies with ambitions and talented employees to fold into their company.