Facebook's stock crashed to new lows this morning after the company's first earnings report since going public in May.
Facebook reported results that were in line with analysts estimates.
But the company also announced that it would be radically increasing its rate of investment, which will hurt its profit margin for the rest of this year and beyond. And the company did not indicate that this investment would produce faster revenue growth, which is continuing to slow.
When Facebook went public, there was a big controversy about the stock's valuation.
Many investors seemed to be willing to pay almost anything for the stock, on the theory that Facebook was "the next Google." Other observers, meanwhile, myself included, argued that the valuation looked extremely expensive, especially in light of the company's sharply decelerating revenue growth.
In the Q2 results reported last night, Facebook's revenue growth slowed even further, to 32% year over year. And the drop in the company's operating profit margin meant that the company's earnings were up only modestly from last year. So, it's not surprising that the stock's valuation has continued to correct, as the market's expectations finally begin to come in line with reality.
That said, there was some encouraging news from the quarter, especially on last night's earnings call. Analyst Michael Pachter of Wedbush Securities says he thought CEO Mark Zuckerberg did an excellent job of explaining the company's long-term outlook to investors and gave the impression that he really does care about the company's financial performance, which many investors have been worried about.
"[Zuckerberg] revealed in his opening remarks that he actually does care about revenue growth and I think he said it so many different ways and sounded quite sincere - I believe him," Pachter says."And I think investors will probably believe him. The guy demonstrated his commitment to be a competent CEO. I was real impressed."
Also, Facebook announced that its critical new advertising product, "Sponsored Stories," is off to a good start, already generating almost $200 million of revenue per year. This product works on mobile as well as the desktop, so it's important for the company as mobile usage continues to grow.
Overall, the quarterly results illustrated the same fundamental tension that has always been a hallmark of Facebook: The company's admirable desire to invest for the long-term at the expense of near-term financial results... and Wall Street's impatience and desire to see an immediate return on investment.
Facebook could not have been clearer about its philosophy prior to the IPO, so no investors should be surprised by it. But, somehow, they always are.
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