Facbeook stock tumbles despite solid earnings report

Facebook CEO Mark Zuckerberg, COO Sheryl Sandberg and other Facebook emplyees celebrate Facebook IPO Friday, May 18 at the company's Menlo Park headquarters. (Zef Nikolla)

July 26, 2012 6:34:02 PM PDT
Mark Zuckerberg was all smiles when he went public with Facebook in May, but he may not be quite so thrilled after his first quarterly earnings report. Facebook beat Wall Street expectations but as your 5th grade teacher might say, "There is still room for improvement." Earnings disappointed investors so the stock fell in after-hours trading and ever since the stock went public, it has been a downward slide. Facebook is down nearly 30 percent since the IPO back in May.

Thursday was report card day for its financial performance and Facebook did OK with a profit of $297 million excluding one-time costs related to its IPO, but its future financial success is going to depend on its ability to generate a lot more revenue online and specifically, on smartphones. Facebook is under the gun to keep up with a moving target, its users. More than half of them are using Facebook on smartphones instead of laptops and desktop computers, and that's where it has to move its advertising to make money.

One of its new ideas is called "sponsored stories." Those are ads based on what people say they like on Facebook. CEO Mark Zuckerberg gave some details how it's doing on an audio webcast. "By the end of June, sponsored stories in newsfeed were at a run rate over $1 million per day in revenue and about half of that is coming from mobile. This is an encouraging start in our effort to generate revenue from the mobile use of Facebook," he said.

As it figures out its advertising strategy, Facebook is benefitting from its partnership with game maker Zynga. Facebook gets 15 percent of its revenue from users playing Zynga games. However, even Zynga players are switching to mobile devices. "One of the ways that Facebook can succeed is through gaming revenue and in fact, e-commerce revenue, more generally, going forward. So, they don't have to rely entirely on advertising and I'm sure the Zynga partnership is very valuable to them," said Jason Garoutte, chief marketing officer of San Francisco-based Mintigo, a Facebook advertiser.

Zuckerberg and his company face other big issues as a high-profile public company that could temper its growth and global expansion. Privacy is a major concern. Ethan Oberman is CEO of San Francisco Spideroak, a cloud storage company. He says Facebook is free, but it needs to address growing concerns in Congress and in the European Union over how it monetizes users' data it collects. "We give them information, then they go out and use to sell to other advertisers and that's how they make their money. And that's OK, and there's nothing wrong with that model, but I think they have to be very transparent about how they do it and what they're doing so the end user can clearly understand and then make a decision," he said.

One thing is certain: Facebook is spending a lot of money. Expenses have nearly tripled compared to last year, coming in at just shy of $2 billion. Much of that is spent on sales and marketing, research and development, and administration.