facebook-stockSocial media giant Facebook (Nasdaq: FB) released its latest earnings report yesterday after the market close. Though the headline were quite strong, investors clearly weren’t impressed with the overall report.

The stock fell by 1.82% in after-hours trading.

Let’s take a closer look at the big numbers Facebook posted in several key areas as well as the reasons why investors aren’t thrilled with the Facebook earnings report.

Facebook generated $12.47 billion in revenue during 2014, roughly 58% more than it did in 2013. Net income reached nearly $3 billion during 2014, almost double the amount earned in 2013.

Facebook ended 2014 on a high note, with strong results during the fourth quarter in particular. Revenue in the fourth quarter grew by 49% compared to the fourth quarter of 2013. Advertising revenue grew by 53% over the same period. Revenue from mobile advertising reached 69% of total advertising revenue, up from 53% the year before.

Video has been another bright spot for Facebook, promising news considering how engaging video advertisements have proven themselves to be. COO Sheryl Sandberg announced on the conference call that 50% of Facebook users view at least one video per day.

The chart below illustrates the growing revenue figures over the past three years.

1.28.15 Facebook Revenue chart

Even if all you care about are Facebook’s user engagement metrics, there’s a lot to be happy about in the Facebook earnings report.

Total monthly active users – the all-important MAU metric used to measure social networks – rose by 13% year-over-year. Meanwhile, mobile MAU’s grew 26%. WhatsApp and Instagram also appear to be growing nicely.

The graphic below illustrates this growth.

1.28.15 Facebook monthly active users

Now the bad news.

For starters, Facebook executives predict that the company’s expenses will grow between 55% and 70% in 2015. Considering that Facebook grew its net income by 49%, the rate at which Facebook’s expenses will grow in the coming year is certainly cause for concern. The company also grew its employee ranks by 45% in 2014.

High expenses have already been a problem for Facebook, as costs and expenses rose in the fourth quarter by 87% year-over-year while revenue only grew by 49%. Clearly this trend is unsustainable, as faster-growing expenses will eventually overtake slower-growing revenue and cause Facebook to lose money if nothing changes.

Considering the rising expenses, shrinking profit margins shouldn’t come as a major surprise.

Operating margin in the fourth quarter of 2014 was 29%. If this seems low to you then you’re right; operating margin was 44% during the same period in 2013. That said, operating margin for 2014 as a whole was 40%, higher than the 36% operating margin achieved in 2013.

It could be that the weak operating margin in the fourth quarter was a fluke. But it could also be the beginning of a trend in which Facebook’s rising expenses significantly cut into its margins and profitability.

Like other U.S. companies with significant overseas operations, Facebook is feeling the negative effects of a rising dollar on its foreign earnings. For example, the company reported year-over-year revenue growth of 49% for the fourth quarter but said that without the impacts of year-over-year currency changes, revenue growth would’ve been 53%.

I expect this to be a recurring theme for Facebook as long as the dollar remains strong.

All of that said, it is important to focus on the bright spots in the Facebook earnings report. Net income nearly doubled in 2014 and revenue is surging. Facebook reaches an incredible 1.39 billion people each month. Still, expenses nearly doubled in the fourth quarter and are expected to continue rising significantly.

Despite surpassing revenue expectations by more than 2% and surpassing earnings per share expectations by 12.5%, investors still sent shares lower after the Facebook earnings report.

If you own or follow Facebook stock then you should be closely monitoring its shrinking margins, rising expenses, and growing footprint.

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Published by Wyatt Investment Research at