Facebook Profit Drops Ahead of IPO: 1st Quarter 2012 Results

Facebook yesterday released its 1st quarter results as part of an amended S-1 filing.

Some things of note:

- Net profit fell 12 percent from $233 million in the 1st quarter of 2011 to $205 million in the 1st quarter of 2012.

- Revenue was $ 1.06 billion in the 1st quarter, a 45 percent increase year over year. At first glance that seems just fine but revenue declined 6.5% sequentially in the first quarter of 2012 compared to Facebook's $ 1.13 billion in the 4th quarter of 2011.

Those results are certainly not the end of the world, but seem fairly weak for a company that's expected to go public with a monster valuation by any standard.

From this Reuters article:

"It was a faster slowdown than we would have guessed," said Brian Wieser, an analyst with Pivotal Research Group. "No matter how you slice it, for a company that is perceived as growing so rapidly, to slow so much on whatever basis - sequentially or annually - it will be somewhat concerning to investors if faced with a lofty valuation," Wieser said.

- Total expenses were up roughly 97 percent over the past 12 months far outpacing the 45 percent revenue growth.

- Monthly active users surpassed 900 million in the 1st quarter, up from 845 million in the last filing.

- Facebook is paying $ 300 million in cash for instagram plus 23 million shares of its class B common stock. Since Facebook says that the fair value of the shares are $ 30.89, that means the 23 million shares are being valued at just over $ 700 million (obviously, anyone can say what they think their shares are worth...whether they are worth that much is another story).  So that brings the total deal value to roughly $ 1 billion for Instagram. Facebook also disclosed it will pay $ 200 million to Instagram if the company's recent deal to buy the photo-sharing start-up for about $1 billion falls through. Wow.

All stocks have a bunch of risk factors that must be listed. One risk factor that's listed in Facebook's S-1 is in the Our CEO has control over key decision making as a result of his control of a majority of our voting stock section. From the section:

As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always be in the interests of our stockholders generally.

Since CEO Mark Zuckerberg owns 58 percent of Facebook stock, anyone who invests has to feel confident that he'll mostly vote in the interest of all stockholders. Who knows, maybe that Instagram deal will make a lot of sense in hindsight. Then again, maybe not.

The initial public offering for Facebook is expected at around $ 100 billion. That looks like a full price to say the least. The New York Times noted yesterday in this article that Google (GOOG) looked stronger than Facebook prior to its initial public offering:

Before Its I.P.O., Google Looked Stronger Than Facebook

The article notes that Google's revenue grew 125 percent in the 2nd quarter of 2004, compared with the same period the previous year then added...

That was much faster than Facebook's 45 percent increase in the first quarter of this year. At the same time, Google increased its earnings by 146 percent as it headed into its I.P.O., not falling like Facebook's profit.

To be fair, Google had lower revenue and earnings compared to Facebook right before it went public (but also a mark valuation that was roughly 1/4 what is expected for Facebook).

In a vacuum, Facebook is still impressive but considering the expected valuation it seems underwhelming compared to alternatives.

With the benefit of time and hindsight maybe Facebook will prove otherwise.

What I know is I'll never gain or lose no matter what the outcome is.

Adam
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Facebook Profit Drops Ahead of IPO: 1st Quarter 2012 Results
Facebook Profit Drops Ahead of IPO: 1st Quarter 2012 Results
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