Two months after its disastrous initial public offering, Facebook will come face to face with shareholders and analysts Thursday when it delivers its first earnings report as a public company.
It will be a second chance for the social media giant to win over the investing public and, most importantly, explain how it plans to adapt its business to the rapid migration of its users to mobile devices.
Facebook’s IPO in May, one of the biggest stock offerings to ever hit Wall Street, was supposed to be a seminal moment in social media, technology and finance.
Instead, the event turned out to be a major humiliation for the company.
A tsunami of stock orders led to embarrassing technical glitches and the company's shares failed to get the expected opening-day "pop." Indeed, the shares stayed above the offering price on that first day only with major support from underwriting banks and since have fallen nearly 24 percent to about $29 from the offering price of $38.
Now angry shareholders are suing Facebook and its lead underwriter, Morgan Stanley, claiming they were misled.
Even before the IPO, Facebook has had to address questions about its financial prospects, particularly in the growing mobile sector, where advertising inventory is scarce.
And there are concerns that Facebook’s advertising growth is slowing.
In a blow shortly before the IPO, GM’s marketing executives said they would pull $10 million in advertising from the social network after judging the efforts had “little impact” in reaching consumers.
In a regulatory filing ahead of the offering, Facebook said most of the $3.71 billion it made in revenue last year came from advertising. The company also said advertising revenue declined in the first quarter of the year compared with the quarter before.
The document reveals more challenges ahead for Facebook, including difficulties generating revenue from new users overseas.
About 20 percent of Facebook's current user base is in the U.S. and Canada, and half of those users access the site using mobile devices. Facebook rivals Google and Apple dominate the mobile business.
What’s more, markets where Facebook is growing most rapidly -- in Europe and Asia -- bring the company less revenue. Facebook brings in $3 per user in the U.S. and in Canada, but only $1.50 in Europe and just 50 cents in Asia.
On the investor side, Facebook’s IPO debacle was a lost opportunity for the company, said J.J. Kinahan, TD Ameritrade’s chief derivatives strategist.
The offering had generated strong interest from young investors under 35, many of whom had never traded stocks but are active Facebook users. Many were likely turned off by Facebook’s less-than-stellar market performance, he said.
“Facebook, and the securities industry, really lost an opportunity there,” Kinahan said.
Facebook could make up some ground with a solid earnings report Thursday afternoon, and Wall Street looks poised to react to it.
Kinahan notes that the July weekly straddle -- a trading strategy where an investor believes a stock's price will move significantly, but is not sure which direction -- is trading at $3 ahead of the report.
“In other words, the market is expecting we have a $3 move up or down based on [Facebook’s] earnings,” he said.
But Facebook’s earnings report won’t just be about numbers. Investors will want to hear from Chief Executive and Founder Mark Zuckerberg on the earnings call with analysts.
Zuckerberg has mostly left day-to-day financial responsibilities to Chief Operating Officer Sheryl Sandberg and Chief Financial Officer David Ebersman. But Zuckerberg needs to speak up on the conference call Thursday, said Michael Pachter, an analyst at Wedbush Securities.
“I think what really matters is Zuckerberg has to get on that call and say, 'I care,' and I think he’s going to,” Pachter said.
“I don’t think Zuckerberg will answer questions, but he has to be on the call,” he added. “If he’s on the call, the stock goes up immediately. He’s the CEO, he can’t just mail it in. He has to show up. I think people care more about that than Q&A.”
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