The Comment That Killed Facebook's Momentum

The Comment That Killed Facebook's Momentum

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

As anticipated, the Federal Reserve (wisely) decided not to touch its bond-buying program at its October rate-setting meeting, which concluded today. However, the central bank's downbeat assessment of the economy sent a chill through the stock market, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average ending the day down 0.5% and 0.4%, respectively, today.

Facebook's teen tantrum
No question about it: Mobile is the growth driver for Facebook . Third-quarter results, released after the market close on Wednesday, show mobile advertising revenue now represents almost half (49%) of the $1.8 billion total ad revenues. Monthly active users (MAUs) on mobile increased 45% year on year to 874 million -- far outpacing the 18% growth in total MAUs (in fact, mobile MAUs now account for nearly three-quarters of all MAUs).

Those results (and other data) are effectively silencing the debate concerning Facebook's ability to navigate the transition from PCs to mobile devices and helped power the company to an earnings and revenue beat for the quarter: Total revenue of $2.0 billion came in ahead of analysts' $1.9 billion estimate, while earnings per share (ex-items) of $0.25 topped the consensus estimate of $0.19.

That was enough to send the shares soaring 15% during the after-hours... until Facebook's management made some comments on the earnings call regarding teens' usage of the website, to the effect that it was stable between the second and third quarter, but that they did witness "a decrease in daily users -- specifically among younger teens." Those comments were enough to wipe roughly $18 billion off the company's market value in the space of a few minutes!

Was this an overreaction? Very probably. After all, Facebook remains far and away the dominant social network among teens: A survey by the Pew Internet and American Life Project conducted in the third quarter of 2012 found that 94% of teens use Facebook, which supports this evening's comment from Facebook CFO David Ebersman that "we remain close to fully penetrated among teens in the US." A May report from the same organization titled "Teens, Social Media and Privacy" noted that "there were no indications in either the national survey or the focus groups of a mass exodus from Facebook."

But speaking of overreactions, with Facebook shares already trading at almost 60 times the estimate of the next 12 months' earnings-per-share estimate, it's a legitimate question regarding whether these latest results -- which are good, certainly -- are enough to justify that super-premium valuation. Facebook is putting up some very big numbers and that appears to be enough to for now; however, investors need to keep in mind that Facebook's success is not assured (just ask the folks at Forrester Research, for example).

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Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool recommends and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published