On Wednesday, Facebook Inc (NASDAQ:FB) reported robust performance of mobile advertising business, but investors were a bit disappointed when the company announced that it has no plans to increase the frequency of ads shown to users.
Factors that caused the decline in Facebook shares
Facebook Inc (NASDAQ:FB)’s stock, which gained 15% in the extended trading hours, fell abruptly to $47.40 from the close of $49.10, down 3%. The social networking company’s stock finally settled at $49.16.
A few months back, Facebook Inc (NASDAQ:FB) stated that it showed one ad per 20 stories in the newsfeed, but during the earnings call Wednesday, Chief Financial Officer David Ebersman revealed that the current ratio – although a bit higher by 5% – will not increase.
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Ebersman’s revelation, along with remarks signaling that U.S. teenagers are now losing interest in Facebook, disappointed the investors. Earlier, the company beat the Wall Street estimate with a 60% increase in revenue owing to growth in their mobile business.
However, the fact is that the social networking company had to balance the volume of ads it shows so that it does not irritate the users and provoke them to explore other options. This fact might not have been considered by some investors, which resulted in a marginal fall in the share price, says a report from Reuters.
Pricing more important than volume
BTIG analyst Richard Greenfield told Reuters, “There seems to be concern about the ad load not going up.” Greenfield added that investors might be overreacting as increasing advertising prices are more important than volume of ads for the growth of Facebook Inc (NASDAQ:FB).
In recent months, Facebook’s revenue and stock prices have escalated due to increase in the paid marketing messages directly into the user’s stream of news and content. The ads are more apt for small size screens, which now amount to a significant portion of Facebook’s revenue.
For the third quarter, Facebook’s advertising revenue from the mobile ads was 49% or approximately $880 million. A year ago, for the same period, when Facebook Inc (NASDAQ:FB) was in the process of evolving mobile ad business, mobile ads earned $150 million.
Mark Zuckerberg said in the conference call that Facebook Inc (NASDAQ:FB) ads are getting popular as the average daily user is “engaging” with more than one ad per week.
Ronald Josey, who is an analyst with JMP securities, said “It looks like they’re firing on all cylinders.” He also said that the problems at the time of 2012 IPO are solved now thanks to the good revenues from mobile advertising.