Facebook hammered as earnings fuel doubts

Posted at 07/28/12 3:42 AM

NEW YORK - Facebook shares took a beating Friday after uninspiring earnings in the first results since the much-hyped public offering of the world's biggest social network.

In morning trade, Facebook shares plunged 15.22 percent to $22.76, worse than the declines seen in after-market trade Thursday. The shares are down some 40 percent from the offering price in May of $38.

Facebook reported a loss of $157 million in the second quarter, largely because of accounting rules requiring it to set aside reserves for stock compensation.

Excluding that, the results were largely in line with estimates, with a profit from operations of $515 million on $1.18 billion in revenues.

But analysts said the social media space is under pressure and that Facebook would need to show more spectacular gains to justify its stock market value.

Victor Anthony at Topeka Capital Markets said the results were largely in line with expectations "but the market wanted more."

Citi analyst Mark Mahaney meanwhile said the company "has established itself as an Internet utility, but it might take a while for Facebook to gain Wall Street love."

Mahaney said Facebook "has hit a fundamentals air pocket," with growth slowing and persistent doubts about how it can make money from the mobile Internet.

"Facebook is showing very early signs of effective mobile monetization, but the market will want/need more proof," he said.

Trip Chowdhry at Global Equities Research said the results confirmed his view that the public offering in May was poorly priced.

"Remain in the sidelines, IPO was totally mispriced and engagement levels on Facebook are not yet stable," he said in note.

Facebook, which made a market splash in May, said that excluding special items, its results for the second quarter showed a profit of 12 cents a share, in line with most forecasts.

The results showed growth for Facebook in overall revenue, operating profits and the number of users -- which grew to 955 million by the end of the quarter.

Revenue for the second quarter totaled $1.18 billion, an increase of 32 percent from the same period a year ago and slightly above market estimates.

Advertising revenue -- 84 percent of the total -- was $992 million, up 28 percent.

Sentiment on the sector took a hit Wednesday when Zynga, a social games firm with strong ties to Facebook, reported weaker-than-expected results.

Zynga shares plunged 37 percent on Thursday and fell three percent in early trade Friday to $3.08, down nearly 70 percent from its $10 offering price in December.

But some remained steadfastly supportive, saying it will take time for Facebook and others to demonstrate their value.

"Wall Street simply doesn't understand Facebook, as they didn't understand Google when it went public," said Lou Kerner of the Social Internet Fund.

Scott Devitt of Morgan Stanley also maintained an upbeat view, saying "we believe investors may come to appreciate Facebook's accelerating ad revenue growth and expanding margins, and therefore see around 50 percent share price upside (growth) over the next 12 months."