According to digital market research firm eMarketer Inc., Facebook Inc. (FB) may post $5.04 billion in sales this year, down from the market researcher’s earlier projection of $6.1 billion as the biggest social network struggles to sustain advertising growth.
Revenues at Facebook will not fly as high this year as earlier estimated, according to a new forecast by eMarketer. But growth is still relatively strong at Facebook, and eMarketer predicts revenues for the company will reach $6.6 billion in 2013.
Total revenues at Facebook will just break the $5-billion mark this year, an increase of 35.9% over 2011, according to the new forecast. In 2013, revenue is expected to increase 31% as Facebook fully rolls out new ad products such as its ad exchange. International revenue is also expected to climb with the expansion of the company’s mobile ad business.
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Revenues from Facebook Payments and other sources are rising more quickly than ad revenues, but from a much smaller base. This year the social networking site will take in $811 million from sources other than advertising, which represents an increase of 45.6% over last year.
In February, eMarketer predicted that Facebook’s total revenues would surpass $6 billion this year, but after the company underperformed market expectations in both Q1 and Q2, eMarketer’s forecast—an analysis of hundreds of data sets on Facebook ad revenues, impressions, usage and other factors collected from dozens of third-party sources—has been revised downward.
The revision downward does not reflect concerns about Facebook’s mobile advertising business. While the February forecast included the assumption that Facebook would start to sell mobile advertising this year, eMarketer did not expect that it would become a meaningful contributor to revenue in 2012.
The new forecast lowers expectations for Facebook revenues by more than $1 billion for the year, following a trend evident from most other firms that have looked closely at Facebook’s revenues over the past year.
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Ad revenues at the social networking giant will continue to rise this year, though at a significantly lower rate than in the past. Revenues will reach $4.23 billion, up 34.1% over 2011, and eMarketer predicts revenue increases in the double digits to continue through 2014, when Facebook’s worldwide ad revenues will reach $6.81 billion. Earlier this year, eMarketer predicted ad revenues at Facebook would reach $5 billion this year, but underperformance throughout the first half of 2012, along with questions about the effectiveness of some of the site’s ad products, have led to the downward revision.
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Paid advertising accounts for the vast majority of Facebook’s total revenue, though its share has been dropping over the past several years. As recently as 2009, advertising accounted for 98% of the company’s intake; this year that percentage will fall to 83.9%.
“Major marketers are still questioning the effectiveness of advertising on Facebook, and they are concerned that their ability to measure results is underdeveloped,” said eMarketer analyst Debra Aho Williamson. “Facebook is working on addressing these concerns, but it must move even more quickly.”
One answer to this problem may already be within Facebook’s control. eMarketer believes the technology underlying the Facebook Marketplace automated ad-buying platform is robust and will continue to support higher levels of spending. The infrastructure supporting these ads, which typically appear on the right side of the page, is efficient and effective, according to eMarketer’s analysis of the system earlier this year, and eMarketer believes that as Facebook rolls out similar automation to its Premium ad offerings, such as Sponsored Stories and other newsfeed ads, those ads will perform better.
eMarketer bases its estimates of advertising and other revenues at Facebook on the analysis of reported revenues from Facebook company releases; estimates from other research firms; Facebook usage trends; and eMarketer interviews with executives at ad agencies, brands, online ad publishers and other industry leaders.
COMMENTARY:
Facebook Inc (NASDAQ:FB) shares opened down on fears of declining ad revenue growth at the start of trading today, and as of 10:35 a.m. PST, Facebook shares were priced at $18.17, down $0.92 or 4.84%. eMarketer's revenue revision did not help matters, and the Facebook shares continue to decline throughout the day.
Facebook Share Price for Friday, August 31, 2012 - Google Finance as of 10:35 a.m. PST (Click Image To Enlarge)
In a blog post dated July 26, 2012, I commented on Facebook's Q2 2012 earnings report, its first earnings report since its IPO. Although Facebook's revenues were up over Q2 2011, stock analysts were disappointed because they felt Facebook should've done much better. Facebook reported revenues of $1.184 billion, but ended the quarter with a loss of $157 million after IPO-based charges. In after-hours trading, Facebook shares dropped by 11.19% to end at $23.84. In my opinion, July 26, 2012 was definitely the tipping point, and Facebook shares have continued to spiral downward since Facebook's IPO back on May 18, 2012 when its share price failed to end with a pop and ended at $38.00.
Facebook Share Prices between its IPO date on May 18, 2012 through August 31, 2012 - Google Finance (Click Image To Enlarge)
Trading fears were intensified further by eMarketer's drastic reduction of its earlier estimate of Facebook revenues in February 2012 by $1 billion, from $6 billion to $5 billion. These revised estimates followed an earlier outlook for advertising growth – eMarketer estimated that revenues would grow 88 percent in 2012, but this is now reduced to 36 percent. Debra Aho Williamson, analyst at the firm, says,
“Sales haven’t been growing as fast as we and others had expected. There is still hesitation about the effectiveness of the advertising, and about how much the advertising is worth.”
Stock analysts have quickly issued reports and price targets on Facebook today:
- BMO Capital Markets Corp - Raised a red flag on Facebook's revenues on fears that businesses may not be spending enough for advertising on the site. The research firm cut its price objective for Facebook Inc from $25 to $15 and has a sell rating on the stock.
- Bank of America Merrill Lynch (BAML) - Issued a neutral rating on the stock and has lowered the price objective to $23. It says that though new ad formats are taking shape, stock supply overhang, due to lock-up expiration, is still a matter of concern. Past selling trends on expiration dates have convinced BAML that there is risk of selling pressure at future dates. The firm’s analysis of new advertising initiatives, such as Sponsored Story ads, Sponsored Search Results, and the Facebook Ad Exchange concludes that these could see results in 2013 and 2014, but there is not much near term visibility.
- Stifel Nicolaus - Issued a hold rating on Facebook and has not issued a price target. The firm also anticipates selling pressure due to supply from lock-up expiration. They are cautious about the monetization challenges facing social/mobile media, though they are convinced about the huge potential of the FB platform and its current tempting valuation. Other positives the firm sees are the current focus of the social network on monetization of its resources and new initiatives, such as mission. Though the jury is out on the impact of the new Facebook initiatives listed below, there is, huge potential for new businesses that could unfold in the future, such as e-commerce, smartphones, and gaming.
- Reach generator.
- ROI measurability/Studio Edge.
- Email address @facebook.com.
- Face.com.
- Integration with iOS 6.
- Mobile app improvement.
- Like button–>Recommend/Want button.
- Promoted News Feed for non-fans.
- PiperJaffray - Issued an overweight rating on the stock, and have a price target of $41.00. Their view is that the stock is an excellent long-term buy, given its huge discount to future potential growth. In the firm’s view negative sentiment has probably peaked after the Q2 earnings report, though it is tough to call a bottom. The likely launch of the Want button may be a major positive for the company, as is also better performance from the mobile business after the positive reception to its mobile-sponsored stories. Of course, lock-up expiration apprehensions remain on the table, but PiperJaffray cites statistical analysis of past IPOs and their expirations, and say that “it is unlikely shares will be heavily impacted.”
Piper notes that investors are likely to pay close attention to the lockup schedule for Facebook insiders with the assumption that it may impact shares of FB. We note that the first lockup expires in mid-August. However, the biggest lockup (>50% current diluted share count) expires in November, which is likely to have the most significant impact on shares, if any.
Facebook IPO Lockup Period Expiration Date Schedule (Click Image To Enlarge)
Since its first lockup period expiration date of August 17, 2012, several early investors, including Peter Thiel, Accel Partners and Microsoft, and most recently Facebook co-founder Dustin Moskovitz have either sold all their Facebook holdings or began selling big chunks. Moscovitz held over 131 million Facebook shares, but their value has plummeted by over 50% since the IPO. According to SEC filings of insider sales, Moscovitz began selling 150,000 shares per day since the first IPO lockup period expired on August 17, 2012. During the week beginning August 20, 2012, Moskowitz sold 750,000 shares. For the week beginning August 27, 2012, Moskovitz sold another 450,000 Facebook shares for a take of about $8.7 million. As of Thursday evening, Moskovitz held an estimated 130 million Facebook shares.
UPDATE: Facebook Inc (NASDAQ:FB) shares hit a new low of $18.08 (down $1.01 or 5.28%) at the end of regular trading, Friday, August 31, 2012. In after-hours trading, Facebook shares continue to show signs of dropping further.
Courtesy of a press release dated August 30, 2012 issued by eMarketer and an article dated August 31, 2012 issued by ValueWalk and an article dated August 30, 2012 appearing in USA Today
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