Facebook Stumbles After Earnings: Buy or Sell?

At first glance, Facebook Inc. (FB) didn’t make any new friends on Wall Street with its third-quarter earnings report. FB shares gapped down at today’s open after the social networking company announced that it will be spending aggressively over the next several quarters. But is it really time to “unfriend” Facebook, or is today’s selling a knee-jerk reaction?

Let’s review the other details from the earnings report. Facebook’s third-quarter revenue jumped 59% over the year ago quarter on strong demand for mobile ads on the social networking site. Mobile ad revenue now accounts for 66% of Facebook’s total revenue, up from 49% this time last year. Facebook also announced that monthly active users rose 14% year-on-year to 1.35 billion.

Facebook reported $3.20 billion in revenue, surpassing analysts’ estimates of $3.12 billion in sales. Net income was $806 million, or $0.30 per share, nearly a 90% increase over a year ago. Excluding special items, adjusted earnings were $0.43 per share, topping the $0.40 consensus EPS estimate by 7.5%.

This was a solid report, but investors didn’t like the announcement that Facebook’s 2014 expenses could be as much as 75% higher than 2013 costs. Following its $19 billion acquisition of messaging application WhatsApp and its $2 billion purchase of Oculus Rift, Facebook has added nearly 1,200 employees to its payrolls.

The bottom line is that Facebook is investing aggressively in its talent pool and mobile presence with the aim to drive sustainable long-term growth.

The analyst community largely supports this strategy, but it spooked investors because Facebook’s big spending will weigh on near-term profits. As for me, I’m comfortable with FB over the long haul. The company has a history of trouncing analysts’ estimates, and it’s still expected to see double-digit sales and earnings growth for the foreseeable future. I recommend FB as a Strong Buy.

Sincerely,

Louis Navellier

Louis Navellier

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