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Let’s get into the really strong earnings results for Facebook (NASDAQ: FB), and then I’ll tell you why I’m not crazy about buying the stock here.
In the Facebook earnings report, the company said revenue exploded from $3.85 billion to $5.84 billion, more than a 50% increase. For the year, revenue rose from $12.47 billion to $17.93 billion, up 45%. Most of this flowed nicely to the operating and net income levels. Facebook’s fourth-quarter operating income rose from $2.22 billion to $3.52 billion, up 60%.
Facebook said its fourth-quarter net income rose from $1.518 billion to $2.265 billion, up 50%. For the year, operating income rose from $7.2 billion to $10 billion, up about 40%, and net income rose from $4.71 billion to $6.52 billion, or about 38%.
These bottom-line numbers are great, no argument. Facebook’s daily active users rose 17% to 1.05 billion. Mobile daily users rose 25%. Monthly active users, which is a number that I am most concerned about, rose 14%. To me, this is the most important number since it shows ongoing sustained usage of the social media site.
Concerns on Facebook Metrics
My concerns lie with a few other metrics. MAUs (monthly active users) were up only 1% over the previous quarter, and only 4% year over year. Europe only saw a 2% quarterly increase and 7% annual increase. Asia-Pacific saw a 3.5% quarterly increase and 22% annual increase. The rest of the world accounted for a 5% increase.
So Facebook has essentially flatlined in terms of users in the U.S. and Europe. Revenue growth is being driven by Asia and the rest of the world. That’s fine, until the global economy stalls. We are also seeing fewer advertisers but those that do advertise are paying more. So the Facebook platform is proving very useful for a select group of advertisers, narrowing the diversification even more.
Facebook trades at about 41 times earnings which, on 38% earnings growth, is not at all unreasonable.
So why I am so down on the company?
Facebook is nothing more than an online and mobile advertising company. Advertising is where almost all its revenue comes from. That alone would make me run away from just about any company. I like diversified businesses with diversified revenue streams. The problem with being a virtual pure-play advertiser is that the company is extremely vulnerable to several things out of its control.
Facebook and the Global Economy
The big issue is the global economy. It’s in trouble. The market is tanking because earnings revisions are coming down across the board, there’s high unemployment here and abroad, and gross domestic product growth is meager. Advertising expenditures rise and fall with the economy. We may be headed for another recession and that traditionally harms advertisers, because people stop buying stuff, so advertisers stop selling stuff.
I don’t like cyclical businesses.
The other problem is that while Facebook is pretty hot as a platform right now, that may not last. Something else may come along. We’ll look at usage growth to see if that is occurring as well.
So while Facebook is not in any kind of danger as far as being a viable company – it unquestionably is – we are left with the same old questions as far as this writer is concerned: should you buy, sell or hold, and is the stock insanely overvalued?
Facebook presents too much risk for my taste. On traditional valuation metrics, it is not expensive. This one is up to you.
The Ghost of Steve Jobs
Before he died, Steve Jobs gave an interview to the New York Times where he revealed his desire for Apple to create something unlike anything the world had ever seen. Though Jobs is no longer around, his dream for this technology is alive and kicking. According to global consulting firm KPMG, this technology “could provide solutions to some of our most intractable social problems.” And Morgan Stanley believes it could save the American economy $1.3 trillion each year.