Facebook (FB) crushed Wall Street expectations for the third quarter when it announced earnings after the close yesterday. And yet the shares closed down 5.68% today to $119.95.
How come?
Some of it is the general market nervous that I spelled out in my Morning Briefing post today. Fear is loose on Wall Street ahead of the November 8 elections.
But part of it has to do with Facebook’s comments about the fourth quarter and future growth. With the market jumping at its own shadow those comments have been enough to send the shares tumbling. (And if by my tone, you think I’m suggesting that the selling is overdone, you’re absolutely right. I added Facebook to my long-term 50 stocks portfolio yesterday. And I’d still recommend that buy today and even suggest picking up more on the drop.)
Wall Street was looking for earnings of 96 cents a share. The whisper number among analysts was even higher at $1.03. For the quarter Facebook reported earnings of $1.09 a share.
Wall Street ha projected that monthly active users would climb to 1.76 billion and Facebook reported growth to 1.79 billion active daily users. Mobile monthly active users climbed to 1.66 billion, up 20% year over year.
So what was the problem with the report?
Three things.
First, a fairly standard warning that the company would find it hard to match this quarter’s growth in the fourth quarter because of tough comparisons with growth in the fourth quarter of last year.
Second, Facebook said that it would invest aggressively in 2017 and that the year would show a substantial increase in expenses. Short-term holders of shares never like that kind of news since they weren’t planning on being around long enough to see the gains from those investments.
And third, Facebook said it is pushing up against the limits on “ad load.” Ad load refers to how many ads Facebook puts on a user’s screen. What Facebook CFO David Wehner said in the company’s conference call is that there is a limit to the number of ads that Facebook can put on a users screen without alienating that user. Demand for ads on Facebook is running hot enough, in other words, so that Facebook may not have the screen “real estate” to accommodate all the advertisers who want to be on the platform. That’s a nice problem to have but it does, in the short-term, hurt Facebook’s ability to wrack up growth numbers that beat expectations.
The solutions to those are pretty clear. The company needs to open new screen “real estate” by selling more ads on Messenger and What’sApp. That expansion isn’t as easy as it sounds since it’s not clear how much advertising users will accept on their a texting service. Facebook will find out but it may take a while to get the answer right. The other solution is to increase the amount of screen real estate by digging deeper and getting users to drill down to services such as restaurant ordering and shopping that Facebook is adding to Facebook. That too may take a while to produce enough new real estate to work around near-term limits to “ad load” but the problem does have longer term solutions.
Stick with the stock through any fourth quarter roughness. Build long-term positions on weakness. I think this is a short-term glitch in growth–if it turns out even to be that.
I will be adding shares of Facebook to my personal portfolio when three days have passed since Wednesday’s buy on this site
