Stock Focus: What does Large Expenditure Mean For Facebook (NASDAQ FB)?

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The big disappointment about Facebook’s quarterly results last week was Facebook Inc (NASDAQ FB)’s forward guidance that revenues for Q4 and for 2015 would be below Wall Street expectations. Facebook warned that its Q4 revenue would fall between $3.6-$3.8 billion, a 40-47% higher year-over-year increase.

40-47% growth may sound impressive, but it is far below its historical growth rate—and more important, below what Wall Street was expecting. The growth problem is simple; it is just the law of large numbers. Facebook has already captured most of the world’s social network addicts, so its best growth days are behind it.

Facebook increased its monthly active users to 1.35 billion as of September 30, 2014, a pathetic 14% increase. That is woefully inadequate for a company that is trading for 85 times earnings. Moreover, Facebook is having very little success at converting very many of the 600 million WhatsApp users, making it appear that it pissed away the $22 billion it paid for it.

Facebook Inc: Large Expenditure From FB To Continue

Not only is the WhatsApp acquisition not delivering growth synergies, WhatsApp is bleeding money. WhatsApp lost $232 million in just the first six months of 2014. Even more insulting is the miniscule amount of revenue that WhatsApp generated in the first half of the year: $15 million!

In 2013, Facebook had $3.2 billion of operating expenses. However, Facebook now says that operating expenses for 2014 will increase by 45-50%, up from a prior outlook of 30-35%. Worse yet, CFO David Wehner warned 2015 will be “a significant investment year,” and said that it expects expenses to increase by another 55-75%! Let me make sure you absorb those numbers.

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Facebook Inc (NASDAQ FB) Business News

Using the low end of those forecasts, that means that 2014 operating expenses will rise from $3.2 billion to $4.6 billion in 2014 and then to $7.2 billion in 2015! Even at the low end (45% in 2014 and 55% in 2015) of those forecasts, operating expenses at Facebook are going to at least double from last year. That’s some serious spending!

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