Facebook shares down 11% on warning of rising costs

January 27 07:28 2015

First, there was good news. Facebook had topped estimates for the sixth straight quarter fueled by mobile advertising. Then, came the bad news. Facebook warned that costs would increase dramatically in 2014 and revenue in the fourth quarter would slow. The revelations spooked the market, causing the stock to plunge as much as 11% in after-hours trading and costing Facebook about a tenth of its market value.facebook-promesaartstudio

Facebook shares had hit a high of $81.16 on Tuesday, more than double its $38 initial public offering price. But in after-hours trading they hovered around $73. “After last quarter’s remarkable acceleration of profit growth, there was nothing to suggest that the margins would not be sustainable,” said Pivotal Research Group analyst Brian Wieser. During a conference call with analysts, Chief Financial Officer David Wehner said there would be “significant” expenses in future quarters as Facebook makes major investments in growing existing products, buying up new companies and bringing more engineering talent aboard.

Wehner predicted a 55% to 75% increase in expenses in 2015. He also forecast revenue growth of 40% to 47% in the fourth quarter, down sharply from 59% revenue growth in the third quarter. Costs rose 41% during the third quarter as Facebook added about 1,200 employees, many of them coming from acquisitions, namely the $21.8 billion purchase of the messaging service WhatsApp and the $2 billion purchase of virtual reality headset maker Oculus VR. Still, Facebook executives said they were pleased with the company’s performance.

The giant social network reported $3.2 billion in third-quarter revenue, an increase of 59%. Wall Street expected revenue of $3.1 billion, up from $2 billion a year ago. Facebook FB had adjusted earnings per share of 43 cents, also surpassing analysts’ expectations. Excluding stock compensation and other expenses, analysts projected earnings per share of 40 cents. “This has been a good quarter for Facebook, and we have achieved strong results across the board,” Facebook CEO Mark Zuckerberg said during the call. Analysts say Facebook has successfully made the transition to mobile as consumers shift their online activities to smartphones and tablets.

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