Facebook, Amazon and the Harm of Increased Spending

Google Inc. (NASDAQ: GOOG) used to be punished for substantial increases in its headcount. Investors wanted to know what value products like Google Maps and Google Apps had if they produced no sales. Headcount still rises every quarter. Google is usually forgiven for this because it makes so much money.

It would be almost impossible for a public company to put up numbers like Facebook’s third-quarter results:

Revenue for the third quarter of 2014 totaled $3.20 billion, an increase of 59%, compared with $2.02 billion in the third quarter of 2013. Excluding the impact of year-over-year changes in foreign exchange rates, revenue would have increased by 58%.

Also:

GAAP net income for the third quarter of 2014 was $806 million, up 90% compared to $425 million for the third quarter of 2013. Excluding amortization of intangible assets, share-based compensation and related payroll tax expenses, and income tax adjustments, non-GAAP net income for the third quarter of 2014 was $1.15 billion, up 73% compared to $666 million for the third quarter of 2013.

Then Facebook CFO Dave Wehner let it slip that expenses would accelerate. That was all Wall Street needed to hear — profligacy.

Amazon’s investors reacted no better when management announced:

• Net sales are expected to be between $27.3 billion and $30.3 billion, or to grow between 7% and 18% compared with fourth quarter 2013.
• Operating income (loss) is expected to be between $(570) million and $430 million, compared to $510 million in fourth quarter 2013.

At that revenue rate, Amazon could watch costs a bit and press out a large profit.

Bezos and Zuckerberg were CEO heroes for a time, at least until they started to spend too much money.

ALSO READ: The 20 Most Profitable Companies in the World