Facebook Inc (NASDAQ:FB) is due to release its earnings report for the first three months of 2013, and investors in the company are excited. The world’s largest social network seems to have performed very well on a technical level in the first quarter, despite lackluster share price gains. One key item many investors seem to have overlooked is the firm’s gross margin, and that may be the most telling metric this time around.
Facebook Inc (NASDAQ:FB) is going to great pains to improve user experience and engagement on its social network, while at the same time, increasing monetization. It’s a tricky balance and for Facebook Inc (NASDAQ:FB) it means a huge amount of development. Right now the market seems to support increases in cost if they lead directly to innovation, but that may change quickly.
Facebook Inc (NASDAQ:FB) is expected to see costs increase by more than 50 percent year on year for the first three quarter of 2013. One report, released by RBC Capital Markets, sees this change as a positive development at Facebook Inc (NASDAQ:FB). It seems that investors are in agreement with that opinion right now, as they’re seeing reasonable returns for the company’s investment.
Facebook Inc (NASDAQ:FB) is, however, in a period of reasonably simple expansion right now. The company is innovating in the field of display ads and user interfaces, but only marginally. As the interface and the ads continue to improve, the marginal cost of improvement is likely to rise, leading to decreasing returns for investors.
Facebook Inc (NASDAQ:FB) margins are currently in the high 55-50 percent range, so there is no trouble for the company quite yet, but costs will rise as investors demand more money be siphoned from the same population of users, and ads will need to be redeveloped constantly throughout the company’s lifetime.
Facebook Inc (NASDAQ:FB) may not be in the low cost business everybody assumes. One comparable company, Google Inc (NASDAQ:GOOG) has managed to keep its margins high, above 60 percent in the most recent report, but there’s no guarantee that Facebook will be able to replicate Google’s phenomenal success.
Web advertising is an old industry by now, and margins are not likely to remain high unless the Google Inc (NASDAQ:GOOG) monopoly remains in place. Facebook Inc (NASDAQ:FB) is not a high cost company, but investors might be underestimating the compression that development costs might have on the firm’s bottom line in the years ahead.