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Facebook revenue growth skids, shares plunge

posted 26 Jul 2012, 15:17 by Mpelembe   [ updated 26 Jul 2012, 15:21 ]

Facebook second-quarter revenue increases 32 percent.

NEW YORK, NEW YORK, UNITED STATES (JULY 26, 2012)  (NASDAQ) - Facebook Inc reported a drastic slowdown in revenue growth and failed to offer financial forecasts to quell fears about its ability to boost advertising growth, sending its shares plummeting to a record low on Thursday (July 26).

In its inaugural earnings report since becoming the first American company to debut with a value of more than $100 billion (USD), Facebook reported revenue increased 32 percent in the second quarter to $1.18 billion, in line with average forecasts. But it offered no outlook for the current period as some investors had hoped.

Shares of Facebook, which has shed a third of its value since its haphazard May debut at $38, hit below $24 in after-hours trading.

"I think it clearly indicates that Facebook shares were overhyped from the beginning. A lot of the classic valuation things that we look at were being thrown out the window because people felt that Facebook was somehow a special company, that they could grow at an enormous clip forever, very high double digit rates. No company can do that. People thought that operating margins of 50 percent plus were sustainable. No company can do that. And what we're seeing this quarter is that the growth slowed down and margin not being defensible, so it's coming down as well. This company is coming back down to Earth in terms of its operating results and you are seeing that reflected in the share price," said Anupam Palit, Senior Research Analyst at GreenCrest Capital.

He added, "I think the biggest concern in the quarter and the biggest story from this quarter is going to be the operating margin. The revenue was ahead, but if this company has to keep spending what it's doing in order to grow revenue, that is not sustainable in the long term. This is the lowest operating margin that we've seen from this company pretty much since results started coming out."

The company, created by Mark Zuckerberg in a Harvard dorm room, raced through eight years of break-neck growth that was to have culminated with its May coming-out party.

Instead, its share price has headed south as investors questioned its valuation of more than 50 times earnings, and its longer-term ability to sustain growth with users migrating to mobile devices.

"Their approach has been that they will build the best possible products, offer the best possible user experiences, and as a result, you'll see more users coming onto the platform and using it more frequently. That being said however, we expect that over the next six to twelve months, Facebook could take a different tact and try to become more proactively oriented towards monetization efforts because it seems pretty obvious like that is a big question mark especially as mobile becomes more and more important for the company," said Scott Kessler, Senior Technology Analyst at S&P Capital IQ.

Monthly active users grew to 955 million at the end of the second quarter, up from 901 million at the end of March. But mobile daily active users surged 67 percent year-on-year to 543 million users, adding further pressure on Facebook's business, which only recently began to offer limited forms of mobile advertising.