Why Did Facebook’s 10-K Scare Investors?

Ahead of the social network’s fourth-quarter earnings report, Facebook (NASDAQ:FB) shares had gained 50 percent since November, but the company’s “spend money to make money” strategy has raised concerns about the company’s future profitability. Shares began falling after the results were released last Wednesday, and since Facebook’s 10-K filing was submitted to the U.S. Securities and Exchange Commission on Friday, the stock has maintained its downward trajectory.

Shares are down over 8 percent since earnings were released, and the release of the 10-K may have contributed 2 percent to that drop. The 10-K is a form used by the SEC to give a comprehensive annual summary of a public company’s performance. Facebook’s report alarmed Wall Street because it showed a pronounced shift in its user base from PCs to mobile.

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In the fourth quarter, the company’s PC daily active users “declined modestly.” This could be problematic because the company’s advertising strategy is yet to prove itself. While mobile advertising revenue rose in the fourth quarter, the growth was not significant enough to satisfy investors or analysts. Furthermore, the company’s increased focus on advertising contributed to a 79 percent fall in net income, which shrank to $64 million as operating expenses jumped 82 percent. That growth outpaced Facebook’s 40 percent revenue gain…

But the pages of Facebook’s 10-K also contained some figures that showed the company’s performance in a more positive light.

One beneficial change in Facebook’s business was its relationship with developers. The report showed that the social network had diversified its developer base beyond Zynga (NASDAQ:ZNGA). Non-Zynga payments remitted to developers tripled year-over-year, growing to $1 billion in 2012. In addition, the number of users buying virtual goods almost doubled since last year.

Pivotal Research Group analyst Brian Wieser also found positives in Facebook’s advertising numbers. In a research note seen by the Financial Post, he wrote that the company’s domestic revenues were higher than its earnings report initially indicated. In his opinion, the best measure of revenue growth comes from the geographic origin of advertising rather than the Facebook user. Wieser estimated that the budget for desktop and mobile advertising in the United States grew 27 percent in the fourth quarter from 24 percent in the third quarter and 8 percent in the second quarter.

Here’s how Facebook and Zynga are both trading over the past week:

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