Wall Street Lukewarm At Best After Facebook’s Fourth-Quarter Earnings Call

The sentiment on Wall Street following Facebook’s fourth-quarter earnings call Wednesday was more negative than positive, with many analysts pointing to the social network’s staggering spending forecast for 2013 in lowering their ratings.

The sentiment on Wall Street following Facebook’s fourth-quarter earnings call Wednesday was more negative than positive, with many analysts pointing to the social network’s staggering spending forecast for 2013 in lowering their ratings.

The company’s costs and expenses skyrocketed during the fourth quarter, driving its net income down. Facebook spent $1.06 billion in the recent quarter, up 82 percent from the previous-year period, causing GAAP (generally accepted accounting principles) net income to plunge to $64 million, versus $302 million in the same quarter of 2011.

Forbes gathered commentary from several analysts on the social network’s earnings call:

  • Brian Pitz and Brian Fitzgerald, Jefferies: They lowered their rating on Facebook to “hold” from “buy,” and lowered their target price to $30 per share from $32, writing, “We are downgrading … as management warns of significantly higher expense levels in 2013 as a result of aggressive hiring and investment plans. While we are broadly supportive of Facebook’s longer-term strategy, the material increase in 2013 spending pressures valuation, making the stock less attractive to own on a near-term basis, in our opinion.”
  • Neil Doshi, Citigroup: Doshi lowered his rating on the social network’s stock to “neutral” from :”buy,” writing, “We view Facebook as a core long-term Net stock, but with plans to invest heavily in the biz in 2013, and little expected contribution from new initiatives like Gifts or graph search, we don’t see any near-term catalysts for the stock. And mobile ads appear to be cannibalizing desktop, which further concerns us. We believe that Facebook can justify a 35-times earnings-per-share multiple (given its high 30 percent EBITDA [earnings before interest, taxes, debt, and amortization] and EPS three-year compound annual growth rate); but, with 2013 numbers coming down, we can’t justify a higher multiple than that. Hence, the neutral.”
  • Daniel Salmon, BMO Capital: Salmon lowered his rating to “market perform” from “outperform” and set his target price at $32 per share.
  • Jordan Rohan, Stifel Nicolaus & Co.: Rohan lowered his rating to “hold” from “buy,” citing concerns about margin compression from recent investments, as well as reduced growth prospects for new initiatives such as Gifts.
  • John Blackledge, Cowen & Co.: He maintained his “neutral” rating on Facebook shares but lowered his estimates in order “to reflect lower expected desktop and mobile advertising revenue and higher expected costs, largely in 2013.”

While negative, cautious, or neutral commentary outweighed accolades, some analysts did have positive things to say about Facebook’s fourth-quarter earnings report.

  • Eden Zoller, Ovum: Facebook’s fourth-quarter-2012 results give cause for optimism and suggest that the company is on the right track following its disappointing initial public offering and the lackluster two quarters that immediately followed. What stands out from Facebook’s fourth-quarter results is the centrality of mobile for its service strategy and growth. Revenues from mobile advertising accounted for 23 percent of total advertising revenues, compared with 14 percent in the previous quarter, with sponsored stories in the mobile news feed and application install ads proving effective. Walmart alone delivered 50 million mobile ads to customers. This solid progress on the mobile advertising front should be applauded, as a key challenge for Facebook has been how to monetize its growing mobile user base, particularly as an increasing number interact with the platform by only via mobile devices. Facebook reported 680 mobile MAUs in the fourth quarter, of which 157 million were exclusively mobile. Facebook also noted that the recently launched graph search would be a pillar for future growth, although it would not be drawn on details. There will be growing pressure for Facebook to monetize graph search over the coming quarters, and the most obvious way it could do so is via sponsored search. Although revenues from Gifts and games only present a small part of Facebook’s revenues, the story on this front was muted, as were insights into Instagram’s contribution to future growth.
  • Andreas Pouros, Greenlight: Key to the demise of historical market leaders, such as Altavista in search and MySpace in social, was too much advertising. It served to increase revenue in the short term but undermined utility and loyalty. Maybe this is why Facebook’s mobile revenue numbers were lower than the market expected, with Facebook perhaps understanding this risk and not being as aggressive as it could have been with pushing ads to the masses. Doing so would have spiked short-term revenue but at a potential long-term risk. For Facebook, the challenge is in how it can increase monetizable engagement between users and advertisers while maintaining quality in terms of both targeting and also user experience. Graph search is capable of doing this at the local business level, but getting increasingly more from big brands is the big challenge.

Readers: What were your feelings about Facebook’s fourth-quarter earnings report?

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david.cohen@adweek.com David Cohen is editor of Adweek's Social Pro Daily.