Facebook: Why its Share Price Keeps Plummeting Despite its Earnings Potential
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Facebook (NASDAQ: FB) has been serving hefty doses of disappointing quarterly results to the investing public since it became a publicly traded company. The financials in its second quarter earnings reports were gloomy and uninspiring – at least to investors looking to see more revenues. In reaction to its disappointing earnings reports, FB’s share price has been on the decline as investors continue to dump the stock.
Some analysts have linked FB’s unsatisfactory second quarter results to Zynga’s (NASDAQ: ZNGA) stumbling and beaten-down earnings reports that missed the estimates of Wall Street experts. Shares of Zynga, a social gaming company, have since tumbled by about 40 percent as investors show signs of dissatisfaction with its $332 million second quarter earnings. The relationship between Facebook and Zynga is symbiotic, as FB has been Zynga’s corporate website where Zynga features most of its popular games. Zynga has been making about 93% of its revenue from Facebook, while Facebook has admitted to making roughly 15-19 percent of its revenue directly from its relationship with Zynga since 2011. So, many investors have concluded that if Zynga’s earnings dwindle, Facebook must also be having troubles with its earnings. But that is partially true!
Put it in dollar figures and you will realize that the 15 percent of Facebook’s first quarter 2012 earnings made directly from Zynga only amounted to $159 million of Facebook’s $1.06 billion total revenue reported for Q1. Though this is significant for Facebook’s bottom line, it isn’t the bulk of FB’s earnings and FB has a future that is worth investing in.
In comparison with the initial public offering price of other social media tech stocks like LinkedIn (NYSE: LNKD), Groupon (NASDAQ: GRPN) and Open Table (NASDAQ: OPEN), FB may soon be on its way to recovering some of its shattered stock price, because it is really making money and it has potential to earn more. Facebook is raking in about $1 million each day alone from the sales of sponsored stories, and more revenue is possible once it has rolled out its social ad unit on mobile for global users. Facebook has more sellers – 2.14 billion shares outstanding – that can collapse the stock if they choose to sell as against LinkedIn’s 103 million shares, but Facebook has about a billion users as a ready target market, from which it can tap more revenue per average user needed to increase its earnings consistently.
Facebook reported $1.18 billion as total revenues for second quarter of 2012, which translates to an increase of 32% in revenues over its earnings for the same period in 2011 – higher than analysts’ estimates. The total earnings also translate to $0.12 per share. Despite this increase in its earnings, the stock still plummeted because of its GAAP and non-GAAP net income losses it recorded during the same financial period. Facebook reported a non-GAAP net loss of $157 million compared to the net income of $240 million it reported for the corresponding second quarter in 2011. Its operating GAAP loss for the second quarter was $743 million compared to a profit of $407 million it made during the same period of 2011.
Another disappointing result in FB’s second quarter results that made investors react against its stock was its negative operating margin, which was 63 percent compared to a positive margin of 45 percent it reported for the same period in 2011. Though the net income losses were incidental to the second quarter and driven by exploding share-based compensation expenses, analysts believe that FB’s operating margin may continue to be negative, considering the company is determined to continue with its expansion drive aimed at helping everyone stay connected.
Facebook has great potential for more earnings if only its plans with Facebook Exchange, Mobile App Ads and its expanded ads for mobile devices can lead to more click through rates and better monetization. Besides, Karma, a social gifting startup business FB acquired on its IPO day, promises to be a good stream of income for Facebook, considering that FB already has your friends’ birthday data and when it reminds you, it gives you a cool suggestion to buy quality but cheap cards for your friends on their birthdays. It surely will generate a sizable income for Facebook, with over $1 billion a year from North America and Europe alone targeting about 450 million people, even if each card goes for $10. The future is bright for Facebook but its current earnings reports call for caution for investors who are looking to invest in this social media tech business.
muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of LinkedIn and has the following options: short OCT 2012 $40.00 calls on OpenTable and long OCT 2012 $40.00 puts on OpenTable. Motley Fool newsletter services recommend LinkedIn and OpenTable. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.