Irrational After Hours Action In Facebook (FB) After Reporting Blowout Quarter

Facebook (FB) shares jump 15% after easily besting estimates but quickly give up gains

With shares up more than 100% in the last 4 months, expectations were sky-high for Facebook’s (FB) 3rd quarter results. Wall street analysts were looking for earnings of $0.19 per share on $1.9 billion in revenue. The market pulse leading up to their results suggested most investors anticipated even better numbers, with the consensus at Estimize predicting $0.21 EPS and sales of $1.93 billion.

FB easily exceeded the loftiest of expectations, reporting that in the third quarter they earned $0.25 per share on $2 billion in revenue. Non-GAAP net income grew 100% to $621 million with Facebook recording a 60% jump in revenues year-over-year. Monthly active users grew 18% to 1.19 billion, fueled by a 48% increase in the number of mobile MUAs to 874 million. Once a huge question surrounding the company, FB continues to successfully navigate the shift to mobile away from the desktop. Mobile ad sales rose nearly 600% year-over-year and accounted for 49% of the company’s total ad sales in the quarter.

Despite the great numbers, shares of FB are currently trading down after hour afterward after initially gaining over 15%. While investors cheered the quarterly results, comments from management during the conference call quickly soured the mood. Two take aways from CFO David Ebersman’s comments appear to be cause of this reaction. Ebersman stated that while their user base among teens remained stable, Facebook has experienced “a decrease in daily users, specifically among younger teens.” He also suggested that adding more ads to user’s timelines as a way of further increasing ad sales was not an option at this point.

Irrational Concerns For Facebook (FB) Lead to Sell-Off Following Conference Call

While a declining teen user base and an inability to sustain ad sale growth are certainly two issues that would be extremely detrimental to FB, it is necessary to put Ebersman’s comments into perspective, and after doing so the sell-off in shares following the conference call appears to be a significant overreaction. Facebook is far and away the leading social network for teens, with 94% of teenagers in the US using Facebook regularly. Having captured 94% of the potential market already, Facebook is essentially fully penetrated among teens in the US. While a decline in daily usage would suggest that teens are increasingly utilizing other social media platforms in addition to Facebook, with the exception of Twitter (TWTR), Facebook owned Instagram is the next biggest and fastest growing social platform among that age group. Instagram has quickly grown to 150 million users, up from 100 million in February, justifying  Facebook’s $1 billion acquisition of the company last year. Should teens continue to spend more time on other social media platforms, the detriment to Facebook is largely limited by the fact that Instagram would likely be the biggest beneficiary of any further migration away from the site. If retaining users is a concern, then the negative response to Facebook not looking to increase the number of ads users see is quite irrational. Further saturating the user experience with more ads would be the easiest way for Facebook to turn users off to their product, something they can not do if they hope to remain the world’s dominant social network. Increases in advertising prices will drive revenue growth going forward, not an increase in the volume of ads, although volume will naturally increase anyways as Instagram begins rolling out advertisements. Facebook is wise to refuse to sacrifice the user experience in the hopes of appeasing short-sighted investors. With their numbers clearly indicating they are firing on all cylinders, FB simply needs to stay the course and continue executing on their plans, the markets will eventually get it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

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