Amazon and Facebook: A Tale of Two Mediocre Earnings Reports

Yesterday after markets closed both Facebook and Amazon reported earnings that should have had similar effects, yet Facebook disappointed and Amazon didn't.

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Yesterday after markets closed both Facebook and Amazon reported earnings that should have had similar effects, yet Facebook disappointed and Amazon didn't. In fact Amazon's results should have had a worse effect than Facebook's, as Amazon matched analyst expectations with a reported $12.8 billion in sales and a net income of $7 million, or a penny a share. Facebook, on the other hand, beat expectations, as we noted yesterday, with its $1.18 billion in revenue, with $992 million of that coming from advertising. Yet, following those two meh situations, Wall Street had oppositte reactions, punishing Facebook and rewarding Amazon.

Facebook's stock had a slight five-ish percent uptick in after-hours trading, at first, but has since been down, hitting new all time lows. Right before the markets open, Facebook is at 23.08, down 14 percent from yesterday. Amazon, on the other hand, is up a few perecent, which The New York Times's David Streitfeld says is about 10 percent below its record high. Analysts have treated the two with different attitudes, too. Facebook needs to do better: "With the unprecedented hype around the company’s I.P.O., some investors believe more upside would have materialized — higher revenues, higher earnings," Jordan Rohan, an analyst at Stifel Nicolaus told The New York Times's Somini Sengupta. Amazon is doing things just right, though. "If they keep this up, there’s a good possibility that you’re looking at shopping malls going the way of the record store and the bookstore and the video rental store," Jason Moser, who covers Amazon for the Motley Fool investment site said to Streitfeld.

The two companies even gave similar explanations for their lackluster revenue numbers: Investments. During the call yesterday, Chief Financial Officer David Ebersman mentioned the $2.2 billion in cash investments and 50 percent increase in staff. This slide show the company put out, too, also has some explanatory charts, like the one to the right. Mark Zuckerberg even put on a good business-man show. As Wired's Ryan tate puts it: "The 28-year-old CEO slid remarkably well into the role of the calm, collected, and confident leading man," he wrote. None of that was enough, however. Amazon, on the other hand, made a convincing case. We’re investing certainly for the long term," Thomas J. Szkutak, Amazon’s chief financial officer, said during the earnings call.

The numbers themselves, however, give the real reason for the distinct reactions. Facebook's don't suggest the certain growth Amazon's do. It has almost 1 billion users, yes. But that shows a slowed user growth rate, especially in expensive markets like the U.S. and Europe, as The Atlantic's Alexis Madrigal explains. "The high-revenue users are in Europe and the United States , but if you look at daily user growth in those countries, you see something like a plateau," he writes. Its revenue growth rate has slowed, too. Over 80 percent of its revenue comes from advertising, and less than half of that is Facebook's magic-sauce "social advertising." And, as we learned recently, web advertising is a precarious business to get into: The value of ads is constantly decreasing. Facebook's growth has to compensate for that. The real worry is that even with that growth, Facebook hasn't proven it can turn its users to dollars. "Before they were a public company, Facebook was judged by growth in users,” Colin Sebastian, an analyst at Robert W. Baird & Company told Sengupta. "Now that they are so well penetrated in most Western markets, growth has to translate into monetization." So when Facebook reports mobile growth numbers like yesterday, it doesn't have Wall Street as giddy because it doesn't yet have ads on its mobile app. To be fair, Facebook also suffered from Zynga's appalling earnings report and the subsequent 40 percent its stock dove.

Amazon, on the other hand, doesn't make its money off of advertising. It sells things. Its investments included building 18 new warehouses to improve its shipping times, something customers value in online shopping. Many people expect this same-day strategy could hurt in the flesh retails stores. Plus, the company is expected to put out a revamped Kindle Fire tablet this year.   These kinds of investments have paid off for Amazon before, explains Streitfeld. "Since its founding in 1994, Amazon has been focused on broadening its product and customer bases, not pumping up its profit margins. And the growth has been tremendous — it is now one of the country’s largest retailers," he writes.

The real difference between these two reports is they tell the tale of two different kinds of tech companies. Facebook sells the social Internet. Amazon sells products. One is much easier to value than the other.

This article is from the archive of our partner The Wire.