Happy hump day! This morning’s post will be a bit reminiscent of yesterday’s, but I think it perfectly illustrates the thought I had – reactions to internet stocks make no sense!

Facebook (FB) was probably the biggest name in my preview list that is reporting earnings this week. I expected great earnings out of Facebook, but I avoided holding the stock going into earnings, because as I told you yesterday, I don’t trust the market to have rational reactions to internet stocks.

Facebook Mark Zuckerberg earnings
Zuckerberg is probably not feeling so confident this morning

Facebook reported third quarter earnings last night and the results were good. The social media company reported earnings per share of 43 cents, beating analyst estimates of 40 cents, and revenue of $3.2 billion, over analyst expectations of $3.12 billion.

Unlike Twitter (TWTR), Facebook did well on user growth, with monthly active users up 14% from last year, and mobile monthly active users up 29% from last year. The company’s cash and operating margin are nicely up as well from last year.

You’d expect the market would be happy and Facebook stock would be trading up after the announcement, right? Nope. Instead, Facebook is down almost 6% in pre-market trading.

Now it’s time to ask the same question we asked about Twitter, what happened!?

In this case, I’m a bit stumped. Unlike Twitter, which saw slowing growth in its monthly active users, Facebook reported great growth on all fronts. The one trouble spot is that they project costs to rise 50% next year, as they invest in talent and new revenue streams like video. But as an investor I don’t necessarily view this as a bad thing, because it means they are investing in growth.

Oddly enough, the main issue for the drop is Facebook’s own success to date. Facebook has been so hyped recently, that investors don’t just expect it to do well; they expect it to blow all expectations out of the water. The problem here is not with the company, it’s with the market. It just doesn’t seem to have rational reactions to these types of stocks.

Ultimately, that is why I am extremely wary of social media investments (well, that plus their price to earnings ratio is too high). There’s no worse feeling for me than feeling like I’ve perfectly researched a stock, and the market reacts in the exact opposite way it should. There’s no way to predict crazy (as I learned the hard way with Twitter), so I’m staying out of these stocks for the time being.


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