Facebook's Q2 Earnings Report -- Or, It's Complicated
So here we are on the day after Facebook’s first earnings report, and, once again, investors are dismayed. The stock seems to have steadied at this writing, but in after-hours trading after yesterday’s release, Facebook stock went to its lowest in its brief history. Clearly, it’s time to start calling Facebook over and find a new bright, shiny object.
Or maybe not. Only in the world of Facebook would a company exceed expectations -- even though, admittedly, expectations were modest -- and experience a 12% stock drop immediately afterward. But, as I’ve jawed on about before – maybe this is why my jaws are so goddamn sore – the thing you have to realize is that the investment community is the last place you should look when trying to figure out the potential of Facebook. It’s frankly too complicated for many of them to get.
I was chatting about this earlier in the day with Carrot Creative CEO Mike Germano. He noted, “A bunch of traders have absolutely no idea what’s possible.”
It’s probably not the most apt analogy, but the Facebook IPO and its aftermath seem like performance art, or maybe a reality show, specially designed for the business community. Whatever the case, what we’re watching is highly conceptual. It’s an experiment into how far a company and its executives can go in running counter to every expectation put before it by shareholders without losing its nerve. And man, is it a fascinating spectacle.
Case in point: CEO Mark Zuckerberg’s refusal to give guidance about the next quarter. True, this has been done before, by the company that Facebook has most often been compared to: Google. Google made it clear from the get-go – in its S1 --that it would never “give earnings guidance in the traditional sense.” But here’s where Zuckerberg is playing this game at a higher level: Facebook isn’t just not giving guidance; the first anyone knew that it wasn’t came yesterday. Whoa!
Whether this is a matter of policy, or a short-term decision, is entirely unknown. But Zuckerberg has to have known that not giving investors an idea of what’s in store for the third quarter would be interpreted as a red flag. One can only guess that he doesn’t care.
The guidance (or not!) issue has little to do with advertising, but if you listen to how Zuckerberg, COO Sheryl Sandberg and CFO David Ebersman conducted themselves on the earnings call yesterday, you’ll see the company’s approach to discussing its advertising revenue stream is part of the same general pattern. Read: Prognostication? We’re just not that into it.
Specifics about how mobile Sponsored Stories are performing, or how the Facebook Ad Exchange is doing, were nonexistent, unless you call a comment such as this one from Zuckerberg rich in detail: “Social ads and News Feed give us a clear path to building a strong business on mobile.”
Investors are also annoyed that Facebook’s operating margins are down – from 53% last year to 43% this year, which is attributed to a quadrupling of sales and marketing expenses. As CFO Ebersman explained, “At this earlier stage of our growth, investment is a top priority as opposed to managing for a target margin. Therefore you can expect us to continue an aggressive pace of investment, in R&D and infrastructure in particular.” In fact, he expected expenses in these areas to go even higher in the third quarter.
Yep, Facebook is doubling down.
But here’s the thing: in terms of running its business, Facebook is doing exactly what it needs to be doing. It’s the investors who don’t understand this. At a time when people are moving to mobile in unprecedented numbers – among other radical behavioral shifts -- do you really expect Facebook to hold back on the R&D? It would be corporate suicide.
Facebook is pushing Sponsored Stories in the News Feed, it’s building out a mobile ad model, it’s rolling out an ad exchange, and possibly, an ad network, it’s educating advertisers about how best to use it. There are entire revenue streams it hasn’t even explored yet. That none of these initiatives are mature enough to please investors is beside the point. Running the world’s biggest social network is speculative in dozens of ways, which is why it’s so damn complicated. It’s as though investors are measuring Facebook in feet and inches, but Facebook has decided to go with the metric system. An investor measuring Facebook using a yardstick just won’t get an accurate read.
Thus, what’s important for Facebook to do now is ignore how it’s being valued ,and keep pursuing its business in just the way it is now. And pay no attention to the shaken investors behind the curtain.