Coverage: Facebook drops after warning on costs

Facebook reported third quarter earnings Tuesday after the market closed, but that didn’t keep investors from selling after hours after hearing the company’s projections for the rest of the year.

Bloomberg had these details in a story by Sarah Frier:

Facebook Inc. (FB) projected fourth-quarter sales that fell short of the highest analysts’ predictions, triggering a selloff in the company’s shares.

Chief Financial Officer David Wehner said on a conference call today that revenue for the current period will be 40 percent to 47 percent above that of a year earlier, indicating sales of $3.6 billion to $3.8 billion. That compares with analysts’ average projection of $3.73 billion for the quarter, according to data compiled by Bloomberg, and is down from 59 percent growth in the prior period.

Wehner said the Menlo Park, California-based company faces a tough comparison to a year earlier because Facebook rolled out ads in members’ News Feeds on a large scale at the end of 2013, which helped spur results at the time. He said expenses are also set to increase 50 percent to 70 percent in 2015.

“We’re comparing against a really outstanding quarter last year,” Wehner said on the call.

Facebook shares plunged more than 11 percent in extended trading after closing at $80.77 in New York. The stock has gained 48 percent this year, pushing the company’s market capitalization past $209 billion.

USA Today reported that many investors were surprised by the projected climb in costs, according to a story by Jessica Guynn:

First, there was good news. Facebook had topped estimates for the sixth straight quarter fueled by mobile advertising.

Then, came the bad news. Facebook warned that costs would increase dramatically in 2014 and revenue in the fourth quarter would slow.

The revelations spooked the market, causing the stock to plunge as much as 11% in after-hours trading and costing Facebook about a tenth of its market value.

Facebook shares had hit a high of $81.16 on Tuesday, more than double its $38 initial public offering price. But in after-hours trading they hovered around $73.

“After last quarter’s remarkable acceleration of profit growth, there was nothing to suggest that the margins would not be sustainable,” said Pivotal Research Group analyst Brian Wieser.

During a conference call with analysts, Chief Financial Officer David Wehner said there would be “significant” expenses in future quarters as Facebook makes major investments in growing existing products, buying up new companies and bringing more engineering talent aboard.

Reed Albergotti wrote for The Wall Street Journal that Facebook was performing well on several metrics it considers important:

Facebook is in a high-stakes arms race with other cash-rich technology companies battling for supremacy in a constantly changing digital landscape. Google, Amazon.com Inc. and Apple Inc. are also on spending binges, whether through new acquisitions or research and development, to expand beyond their core businesses and into a wealth of new areas. Google, for example, has expanded into smartphones, streaming-video devices, eyewear, artificial intelligence and transportation in the past couple of years.

Despite the outlook, Mr. Wehner said in an interview he was happy with Facebook’s performance in the quarter. “We feel like we’re performing well by every measure.”

Those measures include user growth, which Facebook is proving it can still add millions of new members per quarter especially overseas. The company added 33 million more monthly active users in the quarter to give it 1.35 billion, meaning nearly half the Internet-connected world now logs into the service on average once a month.

More impressive, growth in its daily active users—the people Facebook says are the most engaged—rose by 35 million, or 4.2%, from three months earlier, the highest jump in that rate since the second quarter of 2013. It means 64% of Facebook’s users log in daily, a percentage that keeps climbing.

The New York Times reported in a story by Vindu Goel that some of the selling was likely from investors who aren’t thrilled with Facebook’s long-term goals and plans, which is where many of the costs will come into play:

“The core business is phenomenal. Outside of Google search ads, this is the best business we’ve seen on the Internet,” said Ben Schachter, an analyst with Macquarie Securities.

But the enthusiasm faded as Mr. Zuckerberg started talking about the company’s long-term investments. Facebook’s chief financial officer, David Wehner, then warned that next year, expenses would rise 55 percent to 75 percent as the company invested in its new initiatives, including WhatsApp, Oculus and advertising platforms like Atlas that allow marketers to choose the age, gender and other attributes they want to target for ads delivered beyond Facebook.

“They’re really starting to stretch into new and different territories,” said Debra Aho Williamson, a principal analyst with the research firm eMarketer. “They’re going to make some big bets that may or may not be successful.”

Atlas, for example, will allow Facebook to use its knowledge of its users to deliver finely targeted ads on other sites.

“Facebook Atlas is the biggest thing to take on Google in a long time,” said Jan Rezab, chief executive of Socialbakers, a social media analytics firm.

Mr. Rezab also said he expected Facebook to improve the ability of businesses to aim ads at mobile users based on their current locations — a feature that could be attractive to, say, a pizzeria that wants to reach potential customers at lunch time.

But many such long-term investments never pan out, and even if they do, they could take years to pay off.

That underscores the fundamental tension between Silicon Valley founders like Mr. Zuckerberg, who think about the long haul, and Wall Street, which is lucky to think ahead a year or two.

Facebook is making several moves for the future to capture lucrative advertising business as well as appeal to changing consumer demands. Investors selling at this point are likely those who wouldn’t hold the stock for long or who believe Facebook is spending too much money. The company certainly has it to spare, but whether or not it pays off – only time and consumer tastes will tell.