Facebook Still Isn't Likeable
By Andrew Bary
(From BARRON'S)
Wall Street took comfort from Facebook's better-than-expected third-quarter earnings release last week, but the report underscored some of the challenges the company faces as it ramps up advertising to win over the investment community.
Facebook (ticker: FB) looks overpriced after rising $2.94, or 15%, to $21.94. It now trades at 43 times projected 2012 per-share profit of 51 cents and 34 times estimated 2013 earnings of 64 cents. Google (GOOG), in contrast, wins 17times projected 2012 net.
Facebook's price/earnings ratio is significantly understated because analysts ignore roughly 20 cents in annual stock-based compensation, stemming from generous restricted-stock grants to employees. Outside the tech sector, analysts regularly treat stock-based compensation as an expense -- it is, after all -- but tech companies encourage the Street to ignore it in their "pro forma" earnings calculations. If this is factored in, the 2013 P/E rises to 52.
Barron's has been bearish on Facebook since before it went public in May. In a cover story ("Not a Fan of Facebook," Sept. 24), we argued that the shares could fall to $15. If revenue and profit growth falter, that scenario could play out. The stock is down about 4% since the article ran.
Facebook netted 12 cents a share in the third quarter, a penny above the consensus estimate. Revenue, at $1.26 billion, slightly exceeded expectations, while sales were 32% above the level a year earlier. This prompted some analysts to boost their 2012 profit projections, with the consensus rising two cents,
to 51 cents a share.
Analysts like Facebook's aggressive attempt to generate ad revenue from its growing base of mobile users. Mobile accounted for 14% of third-quarter ad revenue, up from zero early this year. "We're just getting started with our mobile-product development and monetization," Facebook CEO Mark Zuckerberg said on the company's earnings conference call.
While mobile-ad growth is up sharply from a low base, desktop ad-revenue gains have slowed compared with a year earlier. Such revenue was up 17% in the third quarter, versus 26% in the second. But desktop ad revenue slid an estimated 5% in the third quarter, relative to the second quarter.
BTIG analyst Richard Greenfield wrote that the Facebook conference call should have been called the "Facebook Monetization Handbook" as management noted many initiatives to wring revenue from its user base of one billion. He contrasts that with Facebook's high-minded emphasis on the user experience in
its initial public offering prospectus. The pressures of a weak stock price --which have hurt employees' morale and pocketbooks -- seem to be changing Facebook's priorities.
"It's hard not to feel like the user experience has taken a 'back seat' to monetization," Greenfield wrote. Facebook is ramping up "sponsored stories" -- a.k.a. ads, in users' mobile news feeds. That may turn off those who view these as annoying, not informative. "While a compromised user experience is likely to
have little impact on near-term earnings, it is critical to long-term engagement and the long-term viability of the platform," Greenfield wrote. Mobile users also may not spend as much time using Facebook because their experience tends to involve quick visits to Websites, not the more prolonged engagement of the
desktop.
All this suggests that Facebook's problems aren't over.
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