More Users = Less Profits? – Facebook Inc (FB), Google Inc (GOOG), Microsoft Corporation (MSFT)

It’s all too easy to get caught up in the hyperbole of financial commentary. If I had a nickel for every time I heard a company was revolutionizing an industry, I would never have to work again. Investors need to remember that a company can produce a product that everyone likes, but that doesn’t automatically make it a sure fire investment. The best example I see in the market today is Facebook Inc (NASDAQ:FB).

Common Sense And The Social Landscape
Facebook Inc (NASDAQ:FB) does have some advantages in being the first to reach its size. For instance, Google Inc (NASDAQ:GOOG)’s Google+ offering has a hard road ahead. To be blunt, I have a Google+ account that I literally never use. I have a tab open on my browser to my Gmail all the time, but I never share anything on Google+ and I don’t plan on it. The reason is simple, everyone is already onFacebook and they aren’t all on Google+, so why do I need another account?

Some people have suggested that Microsoft Corporation (NASDAQ:MSFT) and their redesigned Outlook.com portal could be a real challenger to Facebook Inc (NASDAQ:FB). According to Microsoft though, their Outlook site is the only one of the big three E-mail sites that allows you to connect to Facebook Inc (NASDAQ:FB), Twitter, and LinkedIn. In addition, they suggest only Outlook.com and Yahoo! Inc. (NASDAQ:YHOO) Mail allow you to chat with Facebook Inc (NASDAQ:FB) friends. It seems Microsoft is going after Gmail and Yahoo Mail more than Facebook Inc (NASDAQ:FB) at this point.

All this being said, Facebook Inc (NASDAQ:FB) has limitations as well. For instance, a site like Yelp Inc (NYSE:YELP) is more useful if you want to look at user reviews for companies. While you can post information about companies on Facebook Inc (NASDAQ:FB), the site isn’t designed for an easy search of company reviews. In addition, when most users sign into Facebook Inc (NASDAQ:FB), they are more interested in what their friends and family are doing than writing a review of a company.

More Users Means Nothing If You Can’t Monetize Them
So far one of the biggest problems Facebook Inc (NASDAQ:FB) has is, they have tremendous user growth, but their costs and expenses are rising even faster. The company reported they now have over 600 million daily active users, and that mobile daily active users “exceeded” this number. With revenue up 40%, investors should be happy right?

There are just a few problems. First, Facebook Inc (NASDAQ:FB)’s income before taxes actually was down 2.88%. The driving factor behind this decline was, the company’s operating margin declined to 46% from 55% last year. While this operating margin beats Microsoft Corporation (NASDAQ:MSFT) at 36.22%, Google at 25.97%, and Yelp’s negative margin, this is a significant drop in one year. A large part of this lower margin was due to total costs and expenses that jumped 82.16%. When a company grows revenue by 40% and spends 82% more to do so, you know the bottom line is going to suffer.