Updated: Thu, 31 Oct 2013 09:30:00 GMT | By Reuters

Facebook smashes analyst targets but executive comments spook Street

Investors were upset when Facebook announced that there are no immediate plans of boosting the frequency of as shown to users on the social networking site

Facebook smashes analyst targets but executive comments spook Street (© Reuters)

San Francisco: Facebook Inc posted strong growth in its mobile advertising business on Wednesday but rattled investors after saying that it did not plan to boost the frequency of ads shown to users

Shares of the world's No. 1 online social network soared as much as 15 percent in extended trading before suddenly falling to $47.40, down 3 percent from its $49.10 close. The stock settled at $49.16.

In July, Facebook said it was showing one ad per 20 stories in the newsfeed, but Chief Financial Officer David Ebersman told analysts Wednesday that the current ratio, although slightly higher than 5 percent, would not increase much more going forward.

Ebersman's comments, combined with remarks suggesting that young teenage users in the U.S. were beginning to use Facebook less frequently, soured the mood abruptly on an afternoon when the company topped Wall Street's targets with a whopping 60 percent increase in revenue, driven by its accelerating mobile business.

"There seems to be concern about the ad load not going up," said BTIG analyst Richard Greenfield.

But Greenfield said he believed investors were over-reacting, noting that increasing advertising prices, rather than the volume of ads, is more important for growth in Facebook's topline.

Facebook's newsfeed ads, which inject paid marketing messages straight into a user's stream of news and content, have boosted Facebook's revenue and its stock price in recent months. The ads are ideally suited for the smaller-sized screens of smartphones and other mobile devices, from which nearly half of Facebook's monthly users now access the service.

But the company has had to balance showing more ads inside its users' newsfeed with the fear that too many of them would irritate fickle users and drive them elsewhere.

That's a reality that some investors may have overlooked, after Facebook reported strong third-quarter financial results on Thursday, with advertising revenue up 66 percent.

"There's some degree to which you can expand, but there's an optimal level after which you risk losing your audience," said Pivotal Research Group analyst Brian Wieser, referring to the portion of ads that Facebook shows on its service.

Still, he said the stock's "reaction and counter-reaction was probably a little extreme. This was under any estimation a good quarter."

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