Facebook Inc (NASDAQ:FB) delivered a blowout earnings report last week, and the company is showing impressive strength in key areas like mobile advertising. The social network is moving in the right direction, however, there are some important risks to consider.
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The numbers in the last earnings report were comfortably above analysts’ expectations: the company delivered revenue of $1.81 billion versus $1.62 billion estimated by Wall Street analysts, and earnings per share of $0.19 were also much better than the 0.14 expected by analysts.
Engagement trends are looking strong too: 61% of the company’s 1.15 billion users access Facebook Inc (NASDAQ:FB) services on a daily basis, versus 58% in the prior year. Monthly average users grew 21% and daily average users grew 27% versus 2012. On mobile devices, daily active users grew 60% to 293 million, while monthly active users increased 51% to 819 million.
During the conference call, Mark Zuckerberg addressed concerns regarding declining engagement among teenagers:
“One specific demographic I want to address is U.S. teens. There has been a lot of speculation reporting that fewer teens are using Facebook Inc (NASDAQ:FB). But based on our data, that just isn’t true. It’s difficult to measure this perfectly, since some young people lied of their age. But based on the best data we have, we believe that we’re close to fully penetrated in the U.S. teen demographic for a while and the number of teens using Facebook on both a daily and monthly basis has been steady over the past year and half.”
The biggest success story for the company during the quarter was its ability to monetize its user base thanks to the performance of its news feeds adds. Average revenue per user increased 25% versus last year to $1.60 per user, including a 35% increase in the United States and Canada, as well as gains above 30% in all other regions.
Other companies like Google Inc (NASDAQ:GOOG) and Yahoo! Inc. (NASDAQ:YHOO) have been hurt by lower costs per click in mobile, so the positive news from Facebook Inc (NASDAQ:FB) can be seen as particularly encouraging, considering the hurdles experienced by competitors in online advertising.
Google Inc (NASDAQ:GOOG) reported a decrease of 2% in costs per click for the last quarter, the seventh consecutive quarterly decline in costs per click for the online search giant, and Yahoo! Inc. (NASDAQ:YHOO) suffered an even bigger decline of 8%. Both companies more than compensated for those falling prices with growing volumes, Google sold 23% more ads and Yahoo! increased its volume by 21% in the quarter.
Still, while Google Inc (NASDAQ:GOOG) and Yahoo! Inc. (NASDAQ:YHOO) are seeing lower margins due to reduced costs per click in mobile, Facebook Inc (NASDAQ:FB) seems to be adapting much better to the mobile paradigm and it even delivered rising profit margins for the last quarter.
A word of caution
News feeds ads have clearly been a smart move by Facebook Inc (NASDAQ:FB), but investors need to consider that they were introduced in late 2012, so it’s too early to tell what kind of growth Facebook will generate from these products over the long term. To begin with, the yearly comparisons will get much tougher next year as the company continues growing its news feeds ads during 2013, figures in 2014 will be measured against a much higher base.
Because news feeds are still quite new, it isn’t entirely fair to compare them head to head against the search and display ads used by Google Inc (NASDAQ:GOOG) and Yahoo! Inc. (NASDAQ:YHOO) either. Novel products usually outgrow existing ones in their first stages of expansion, so we need to wait until the dust settles to make a clearer assessment about Facebook Inc (NASDAQ:FB) and its ability to compete against well established players like the online search engines.
The search business is especially attractive when it comes to online advertising, as many ads provide a valuable service to the user. Think of a Chinese restaurant ad as an example when someone searches for “Chinese food” in a certain geographic area, both the user and the advertiser gain from the ad, and this means that companies like Google Inc (NASDAQ:GOOG) and Yahoo! Inc. (NASDAQ:YHOO) are in a position of strength to compete against Facebook Inc (NASDAQ:FB) in the long term. Facebook ads, on the other hand, are mostly an inconvenience for its users
Its also worth noting that Facebook Inc (NASDAQ:FB) is trading at a sky high P/E ratio of almost 44 times earnings estimates for the next year, while both Google Inc (NASDAQ:GOOG) and Yahoo! Inc. (NASDAQ:YHOO) trade at forward P/E ratios below 17. I`m not saying that Facebook can´t grow fast enough to justify such a premium, but high expectations sometimes lead to big disappointments, and that´s an important risk to consider.
Bottom line
Facebook Inc (NASDAQ:FB) has made some remarkable improvements over the last quarter, and the company´s news feeds could be a powerful move to adapt and thrive in the mobile paradigm. However, one quarter does not make a sustainable trend, especially when it comes to analyzing a new advertising product. Facebook´s friend proposal is getting more interesting, but I don`t know the company well enough to accept it yet.
Andrés Cardenal owns shares of Google. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of Facebook and Google.
The article A Friend Request From Facebook originally appeared on Fool.com.
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