Facebook delivered fourth-quarter results above Wall Street's expectations on Wednesday and sought to show that it has finally transformed into a "mobile company" after rising to dominance as a Web-based social network.
But its stock dropped in after-hours trading as investors placed more significance on the company's growing expenses rather than on its increasing user base and higher advertising revenue.
"Everything was slightly better than expected," said Wedbush Securities analyst Michael Pachter. "I don't see anything here that would make me want to sell the stock."
Nonetheless, Facebook's stock fell $1.11, or 3.6 percent, to $30.13 in after-hours trading following the earnings report.
Facebook Inc. grew its revenue and increased the percentage of it that comes from mobile advertising — a closely watched figure. But expenses also grew sharply. The company also said 2013 will be a year of "significant investments" and hiring as it focuses on long-term growth rather than short-term profits.
The world's largest social media company earned $64 million, or 3 cents per share, in the October-December period. That's down 79 percent from $302 million, or 14 cents per share, a year earlier when it was still a privately held company.
Revenue rose 40 percent to $1.59 billion from $1.13 billion, surpassing analysts' expectations of $1.51 billion.
Advertising revenue grew 41 percent to $1.33 billion, increasing at a faster clip than in the third quarter, when it climbed 36 percent to $1.09 billion.
Excluding special items, mainly related to stock compensation expenses, Menlo Park, Calif.-based Facebook earned 17 cents per share in the latest quarter. Analysts polled by FactSet expected lower adjusted earnings of 15 cents per share.
"There were no major red flags," said Raymond James analyst Aaron Kessler. "I think expectations may have even been just a little bit higher" than analyst estimates indicated, which may be another reason for the stock price drop.
Facebook's biggest challenge lies in mobile devices. Most Facebook users access it using a mobile phone or tablet computer, yet the 9-year-old company only started showing mobile ads about 9 months ago. Investors have been worried that Facebook isn't taking advantage of its growing mobile user base since before the company's initial public offering in May. Analysts said Wednesday's results show that it is on the right track.
Facebook said it generated 23 percent, or $306 million, of advertising revenue from mobile. That's up from 14 percent or $153 million in the third quarter, the first time it disclosed such information.
Facebook views the mobile space as its biggest opportunity, a point CEO Mark Zuckerberg sought to drive home during Facebook's conference call with analysts.
"It allows us to reach more people, we have more engagement from the people we reach and I think we will be able to make more money for each minute people spend with us on ... mobile devices," he said.
The inroads Facebook made in mobile advertising in the final half of last year impressed Bruno del Ama, CEO of Global X Funds, which owns about 50,000 shares of the company's stock. "We have been surprised about how aggressive they have been," he said.
Facebook has been trying to squeeze in more mobile adverting without alienating users who are more interested in conversing with their friends than being subjected to a marketing blitz. The company appears to be striking the right balance so far, based on the number of people still regularly using the mobile apps, said Kessler of Raymond James.
While Facebook's accelerated revenue growth is a positive sign, there's still a feeling that the company could be doing even more to mine revenue from its mobile audience, Kessler said. He expected Facebook's mobile ad revenue to rise to 25 percent of the company's ad sales or about $350 million in the fourth quarter.
Facebook's monthly user base grew 25 percent from a year earlier to 1.06 billion accounts. About 680 million of them access Facebook using a mobile device each month. The company also said that the number of mobile users who access the site every day surpassed daily users on the Web for the first time in the fourth quarter.
As of the stock market's close on Wednesday, Facebook's stock was up 60 percent since the company's third-quarter earnings report came out in October. But it still hasn't hit its initial public offering price of $38.
The May 18 IPO was by far the biggest one for an Internet company since Google's in 2004, but the excitement quickly deflated. With Wall Street now clamoring for even more mobile ad growth, Facebook's toughest task will be to increase the number of ads on the social network without alienating users.
Pachter suspects that investors may be worried Facebook's expenses are starting to outstrip its revenue growth. That was the case in the fourth quarter when the company's costs, excluding employee stock compensation, soared 67 percent from the previous year to $849 million, mainly due to hiring and infrastructure costs such as data centers and servers. And Facebook promises to keep on spending.
David Ebersman, Facebook's chief financial officer, said Facebook expects total expenses, excluding stock compensation costs, to grow by about 50 percent in 2013. In 2012, these costs amounted to $2.83 billion, an increase of 63 percent from 2011.
The company ended the year with 4,600 employees, a 44 percent increase from the end of 2011.
AP Technology Writer Michael Liedtke contributed to this story from San Francisco.