Lack of 'young' users casts shadow on stunning Facebook results

Facebook released its third quarterly results surprising analysts with soaring growth in key revenue segments over the July-September period.

Facebook was riding the high with an 18 percent spike in stock prices, moving from $49.14 to #57.98 within moments of the results, and precipitously falling to $48.44 before steadying at $49.01 by the end of the day.

Its total quarterly earnings stood at $425 million, which was a remarkable bounce back from its $59 million loss during the same period last year.

The company also beat analyst predictions by nearly 33 percent in its adjusted earnings at $621 million, reflecting in earnings of 25 cents per share earnings over the last quarter building significantly on its fundamentals.

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Total revenue grew 60 percent to $2.02 billion from $1.26 billion largely aided by the 60 percent hike in mobile advertising. This too was an analyst surprise since predictions were $1.91 billion.

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Advertising revenue was critical in the overall growth, $1.8 billion of which was from advertising alone, 49 percent exclusively from mobile.

Research firm eMarketer predicts a 15.8 percent market share for Facebook in global mobile ad spend in 2013, which is a radical increase from 5.4 percent last year. Looking at Google’s incremental hike to 53.2 percent from 53.4 percent in 2012, these results show significant shift in mobile influencing power.

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The success of Facebook’s financials is also backed by its nearly 1.2 billion users worldwide, an 18 percent hike over the last year and an average of nearly 730 million daily users during September alone. The reliance on such a dedicated and broadly segmented demography of customers places Facebook’s future prospects in an optimistic light. However, investors perceive shifts in the demography mix with caution when anticipating future changes in revenue.

An example of this was demonstrated in the volatile reactions in the face of the results soon after release. This was not surprising considering the decline in usage trends by Facebook’s younger customers. As Facebook CFO David Ebersman announced the decline in the daily usage from its teenage market segment, investors showed flailing confidence in the company which resulted in the volatile share prices.

Investor confidence hinges on the revenue potential from all demographic segments; however, the youthful consumer spending is a large source of earnings for any online platform.

Promoting products such as fashion, technology and other lifestyle brands on its platform builds Facebook’s credibility for advertisers. The last year however has witnessed a drop in Facebook’s standing as the top choice for younger users, falling to 23 percent in 2013 from last years 44 percent according to financial firm Piper Jaffray. The youth consumer spending market makes up more than $200 billion in the United States alone and is of significant interest to investors and companies everywhere.

Competing with other social networking platforms for younger consumers has also been a challenge over the last year for Facebook and has not given investors any comfort.

The current announcement coupled with last weeks policy changes on Facebook, allowing younger teens to publicly share their content on the platform, demonstrates an already in motion strategy by Facebook executives to tackle the declining appeal Facebook seems to have developed amongst the much desired younger demographic.

Facebook no longer occupies the number one rank and is positioned behind Twitter, which has a 26 percent market share. The silver lining for Facebook is its ownership of Instagram, which also has a 23 percent market share.

How the youthful but fickle customer base or the equally fickle investors will react to the next series of changes remains to be seen, but for now, Facebook can rest a little easy with its greater than expected third quarter results.