Here’s Why Facebook Can’t Keep the Bears Away

Facebook (NASDAQ:FB) is due to release first-quarter 2013 earnings after the bell on Wednesday, and the atmosphere is thick with speculation and expectation. On average, analysts are looking for the social network to post earnings of $0.13 per share on revenue of $1.44 billion. The stock is down more than 11 percent since the end of January, when the company last reported, and is off more than 27 percent since its debut on the Nasdaq in May of 2012.

To recap, Facebook’s fourth-quarter results were mixed bag of good and bad news. Revenue grew 40.1 percent to $1.58 billion and beat the mean estimate of $1.53 billion. Earnings grew 13.3 percent to $0.17 per share, and beat the mean estimate of $0.15. Monthly active users climbed 25 percent on the year, while daily active users were up 28 percent. Perhaps most importantly, mobile revenue increased 9 percentage points to 23 percent of total ad revenue, a tremendous step in the right direction give the company’s still-outsized mobile traffic-to-revenue ratio.

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But resting just behind the top- and bottom-line beats and strong user growth was some noise that woke up a lot of bears (there’s about a 7.5 percent short interest on the stock, slightly down from March), and bullish theses on the stock could be undermined if the concerns aren’t addressed in the upcoming report.

One of the first negative signs out of last quarter’s report was a drop in operating margin from 48 to 33 percent. (The GAAP annual operating margin for 2012 was just 11 percent — non-GAAP was an attractive 44 percent.) Operating costs climbed 67 percent, faster than revenue, to $849 million. R&D spending increased 139.5 percent on the year as the company searched for a way to monetize its rapidly-growing mobile user base, 680 million strong (68 percent of total) at the end of the last quarter.

What’s more, mobile-only MAUs grew 89.2 percent year over year to 157 million, or nearly 16 percent of total users. Mobile-only MAUs grew at a faster rate than total MAUs (25 percent year-over-year growth), and faster than mobile active users in general (39.4 percent year-over-year growth).

If this is at all indicative of a usage trend, then Facebook is looking at a future where, in the absence of effective innovation, revenues will decline. Just to reiterate the point, mobile ad revenue accounted for just 23 percent of total ad revenue, which is not at all proportional to mobile use volume. As it stands, Facebook earns far less money per mobile user than per desktop user.

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To tackle this, Facebook has deployed the “it takes money to make money” model. Consensus is that mobile is the future, and Facebook is mobile, but the business model hasn’t been totally fleshed out yet. There are advertising dollars to be earned, but the mechanisms, services, and products aren’t necessarily mature enough yet.

Over the course of the first quarter Facebook has taken a few significant steps toward addressing this. Investors and curious onlookers will be looking for the evidence in the earnings. But what has tripped up the stock in the past — and what could trip up the stock again — is that since Facebook is bushwhacking its way through the markets and foraging a new and unique business model, how good or bad its results are is highly subjective.

Until Facebook is able to demonstrate that it has matured as a company and that its model is not at risk, it will be easy to interpret “not quite there yet” results as not being good enough.

Don’t Miss: Here’s a New Problem for Facebook: A Mass User Exodus.