Facebook Stock Out of Favor

According to eMarketer, Facebook claims the biggest online display advertising market revenues from the U.S. after overtaking Yahoo last year. This year, Facebook is expected to account for 16.8% of the U.S. online display advertising market share. Google is projected to have 16.5% of the market share compared with 13.8% last year, and Yahoo’s share is expected to fall from 10.8% last year to 9.1% this year. But the growing market share is not helping Facebook’s stock price performance.

Facebook’s Financials

A few days ago, Facebook (Nasdaq:FB) reported its first ever quarter results since going public. Q2 revenues grew 32% over the year to $1.18 billion, ahead of market expectations of $1.15 billion. Advertising revenues came in at $992 million, while payment and fees revenues brought in the remaining $192 million. EPS of $0.12 was in line with the Street’s targeted earnings for the quarter.

In operating metrics, average revenue per user grew from $1.21 last quarter to $1.28 this quarter. A year ago, the metric stood at $1.26. Facebook now boasts of 955 million monthly active users, of whom nearly 552 million were active on a daily basis. ComScore estimates that in June 2012, time spent by Facebook users online increased 5.1% over the year and 1% over the previous month to 400.2 minutes. Facebook will be pleased by the increasing strength of its mobile device users. Last quarter, mobile users for the site grew 67% over the year to 543 million.

The company did not provide guidance for the coming quarters. Analysts are hopeful that the company will report earnings of $0.37 per share this year. EPS is projected to grow to $0.41 in 2013, to $0.62 in 2014, and to $1 by 2015.

Facebook’s Monetization Strategy

Despite market growth, analysts remain concerned about the company’s monetization strategy, especially given the changing demographics of its user base. Facebook is seeing an increased shift toward mobile devices. Banner ads do not work as well on smartphone like devices, and Facebook will have to come up with a more effective advertising solution. The company is thus focusing on Sponsored Stories, which it believes will help it to improve mobile monetization.

Sponsored Stories let businesses use news feeds so that they give priority to messages that talk about their businesses. Because most Facebook users spend a majority of their time on the news feed, Sponsored Stories will enable marketers to interact with their customers. Even though the service was launched on a small scale, Facebook estimates that it generates more than $1 million a day of revenue for Facebook.

Analysts believe that Sponsored Stories may not be enough. For improved monetization, Facebook will have to do much more and look to introducing features like location-specific advertising and rich media advertising. But increasing advertising content remains a tough challenge as Facebook will need to maintain an optimal balance of advertising; increased advertising on the site may end up sending users away, and reducing it will be a cause of worry to investors.

Facebook’s Acquisitions

As part of its talent acquisitions, last week Facebook acquired Acrylic Software, a Mac iOS developer. Vancouver-based Acrylic is a developer of apps for Apple Inc.’s OS X and iOS platforms. The company is best known for its personalized newspaper app, Pulp, and secure database app, Wallet. However, market news suggests that the acquisition was made more to add the employees of Acrylic than its products. Facebook also acquired Spool, another provider of free iOS and Android apps that let users bookmark web content and view it later offline. As Facebook acquired the team and not its products, Spool announced that their apps for Android and iOS will be shut down. Hopefully, Facebook will use Spool’s talent to develop their own mobile apps for iOS and Android.

Facebook paid $60 million to acquire facial recognition software company Face.com. Face.com is already being used by Facebook to help tag photos on their site. Face.com also offers an application programming interface that powers third-party apps to allow users to search for photos of celebrities on Twitter using facial recognition technology. Facebook is expected to leverage Face’s technology to enhance its mobile experience.

Facebook’s stock is trading at $21.22, with a market capitalization of $45.37 billion. The stock has been hovering around lows of just under $21 in trading this morning

The quarterly results may have met market expectations, but analysts are worried about Facebook’s slowing growth rate and the company’s mobile monetization strategy. Adding pressure to the price is the worry that the initial stock lockup period will be over this month, August, and several executives and investors will very likely sell their holdings.