Shares of Facebook (FB) are down $3.77, or almost 14%, at $23.08, and briefly set a new all-time low of $22.28, after the company last night reported Q2 revenue slightly ahead of analysts’ estimates and profit in line with expectations for its first report as a public company since its IPO on May 18th. The company didn’t offer a forecast for the quarter nor for the year.
Analysts this morning are trimming estimates for the company given management’s comments that the company expects to spend more heavily in the latter half of the year as it invests in the business. It’s interesting to note that there are no upgrades of the stock given the price today is far below many price targets, of which the lowest I’ve seen is $25.
There was much discussion on the conference call of the shift to mobile usage, and how Facebook sees its “sponsored stories” and “news feed” features as ways to increase ad spending in the context of mobile.
Of note, since this was the first conference call, several analysts observed that remarks by CEO Mark Zuckerberg, COO Sheryl Sandberg, and CFO David Ebersman were rather vague; the phrase “party line” comes up in some notes. It seems analysts would have liked more tangible, specific information on the call.
Michael Pachter, Wedbush Securities: Reiterates an Outperform rating, while cutting his price target to $35 from $44. “Advertising revenue was up 28% in Q2, well above our growth expectation of 17%, due to an 18% increase in the number of ads delivered, and a 9% increase in the average price per ad. The number of ads increase was driven by user growth and changes that resulted in more ads per page, but ad growth still trailed user growth due to more usage on mobile phones. The increase in ad prices was driven in large part by the ramp-up of Sponsored Stories in News Feeds on PCs and mobile devices in the United States. Sponsored Stories have higher click through rates and prices as they are displayed in the user�s area of focus. By the end of the quarter, Sponsored Stories in News Feeds had a daily revenue run rate of over $1 million, with mobile accounting for roughly half. Strong mobile growth. Mobile MAUs grew 76% and 143% in 2011 and 2010, respectively, roughly double the growth rate of total MAUs of 39% and 69% over the same time periods.” Pachter raised his 2012 revenue estimate to $4.91 billion from a prior $4.75 billion, while cutting his EPS estimate to 41 cents from 50 cents. For 2013, Pachter raised his revenue estimate to $6.02 billion form a prior $5.81 billion, while cutting his EPS estimate to 55 cents from 65 cents.
Victor Anthony, Topeka Capital Markets: Reiterates a Buy rating and a $40 price target. “We believe guidance would have helped stabilize the share price but ultimately some patience will be needed as this growth story builds [...] Advertising revenues of $992MM, +27.8% YoY, was $3MM above our estimate of $989MM, with monthly ARPU of $0.35, ahead of our estimate of $0.34; ARPU grew in the double-digits in every region except Europe, a positive, given the shift to mobile. We note that the ad growth is materially above industry growth rates. In addition, FB noted that it did not ramp sponsored stories until June, in both mobile and desktop, monetization rates are improving, and they have yet to launch in every country. This implies that 3Q ad revenue growth could likely come in above current expectations.” Among the few negatives, Anthony notes that “capex of 35% of sales remains at elevated levels leading to negative free cash flow.”
Anthony DiClemente, Barclays Capital: Reiterates an Equal Weight rating, while cutting his price target to $31 from $35. “The call lacked granularity around the 2H outlook. Ad pricing growth was much better than our expectations on the ramp in Sponsored Stories and News Feed ads, which drove higher conversion. However, volume growth decelerated given the shift to mobile platforms. It is very early days on deciphering the impact of how these ad products will affect the FB ad revenue trajectory.” His expectations are also lower for Facebook’s proceeds from online games, an allusion to weakness reported Wednesday by Zynga (ZNGA), which had already been a concern going into the report. DiClemente raised his estimate for this year’s revenue to $4.9 billion from $4.85 billion, but cut his EPS estimate to 41 cents from 48 cents. He cut his 2013 estimates to $6.2 billion and 43 cents from a prior $6.6 billion and 66 cents.
Rory Maher, Capstone Investments: Reiterates a Hold rating, writing that the company’s monetization of users in Asia is of particular concern: “ARPU in Asia increased Q/Q to $0.55 from $0.53, but still remains well below U.S./Canada�s $3.20 ARPU. We believe this could weigh on revenue growth the next few years as Asian users grow at a greater rate than N. American users. For example, Asian users increased an average of 10% Q/Q the past four quarters vs. 2% for N. American users.” Like DiClemente, Maher was disappointed by the rather vague tone of the call: “We understand that management can�t outline its gameplan for the world to see on its conference calls, but we were hoping for more clarity into how it would grow Facebook into a bigger business beyond the standard �extract value� from other industries party line.” The higher spending outlook for the year causes Maher to cut his estimates to $5.08 billion and 50 cents from a prior $5.12 billion and 76 cents.
Spencer Wang, Credit Suisse: Reiterates a Neutral rating and a $34 price target, writing that he has a “positive bias” toward the company, that it is “well positioned to capitalize on the growth in social media,” and the Q2 results were “generally solid.” Although “growing mobile usage continues to present challenges,” the stock price at present doesn’t seem to reflect the upside potential, he thinks: “FB is now trading in-line with our valuation for just the core business plus its NOL (~$23/share). This implies that little is being ascribed for new revenue opportunities (mobile, ad network, expanding payments), which we value at $11/share, and is included in our $34 price target.”
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