Investors unfriend Facebook as earnings report causes stock drop

Facebook (FB) closed out Wednesday on Wall Street with a solid fourth-quarter earnings report that actually managed to exceed market estimates. And yet, stock in the popular social network company tanked to the tune of 8% by Thursday as investors showed their displeasure. What’s on their mind?

Zuckerberg’s internet empire boasted a 25% revenue growth and earnings per share of $2.56, easily surpassing projections. Number of active users on Facebook continues to grow and revenue per user also exceeded expectations at $8.52.

"We had a good quarter and a strong end to the year as our community and business continue to grow," Facebook CEO Mark Zuckerberg said in a statement. "We remain focused on building services that help people stay connected to those they care about." On paper, everything looks good, so why are investors punishing the big F?

High hopes...

Facebook stock had hit a record-breaking high and yet, even with surpassing Wall Street targets, it wasn’t quite as high as some investors had hoped.

“We think expectations were high. And they weren’t met. We call this an Expectations Correction – as opposed to a Fundamentals Correction,” says RBC analyst Mark Mahaney, one of several analysts cited by Yahoo Finance as being disappointed by Facebook’s strong but not overwhelmingly positive results.

...and slowing growth

Others point not to investor expectations but rather to a metric that is declining despite the earnings on the rise – namely, rate of growth. Earnings growth slowed to 8%, down from 20% in the previous quarter. The 25% sales growth was positive, but still counts as Facebook’s slowest quarterly growth rate in more than four years.

Pivotal Research Group analyst Michael Levine dropped his price target on Facebook stock to 215 to 245 and downgraded Facebook from buy to hold.

"The slowdown, particularly in the U.S., was far greater than we expected and sounds likely to persist," according to Levine’s note. "We expect these results to act as an overhang to the entire online advertising coverage universe — so expect to see peers under pressure." Levine wasn’t wrong, as Snap and Twitter also took a hit following Facebook’s stock stumble.

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