The Real Catalyst for Facebook
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Facebook (NASDAQ: FB) rose more than 5% on Wednesday after investors learned that Mark Zuckerberg was planning to hold his shares of the social network for one more year at least. The stocks is still more than 50% below the IPO price, so it's a good time to go through some ideas regarding Facebook as an investment.
Valuations matter to some degree -- they always do -- but in this kind of company it’s all about innovation and future business opportunities. The fact that shares of Facebook are much cheaper now than a few months ago is not the biggest game changer for investors. The market will be willing to pay dearly for Facebook shares if the company can deliver a solid growth strategy, but no price will be low enough if it doesn't materialize.
Take a look at LinkedIn (NYSE: LNKD), for example. The stock has risen more than 90% from its lows around $60 at the beginning of this year to more than $114 currently. LinkedIn is trading at a P/E ratio above 900, but investors don´t seem to care too much for stratospheric valuations as long as the company has a trustworthy business model. LinkedIn has found a very solid monetization strategy via advertising, hiring solutions and premium services, and that´s what explains the big difference in returns between both social networks.
The true catalyst for Facebook will not be the valuation level or even what Zuckerberg and his team do with their holdings; the monetization strategy is the crucial thing to watch in this case. Advertising is not convincing enough at this stage; some clients have expressed their doubts about the convenience of Facebook ads, and mobile represents a true challenge for Facebook when it comes to adapting that business model to a changing paradigm.
Even the king of online advertising, Google (NASDAQ: GOOG), is facing a challenge in its adaptation to mobile. Google is in a much better position than Facebook to face the transition; the search business is an ideal product for online advertising – be it desktop or mobile – and its Android operating system gives Google a valuable venue in which to capitalize on the most popular smartphone platform around the planet.
In spite of that, Google has admitted that the shift towards mobile could have some negative implications for profitability in the short term, which is a clear indication of the difficulty of the task ahead. The undisputed leader in online advertising, with a rock solid position in mobile, is seeing decreased profitability from the mobile revolution, so the fact that Facebook is facing some problems there is not really such a big scandal. Technologies change, and adapting to those changes takes time and effort.
Apart from advertising, there are other monetization strategies which could be really interesting for Facebook. Online gambling is one idea that Facebook is implementing in the United Kingdom: the company will start offering online bingo to users aged 18 and older, and slot machine games are expected to be available in the short term.
Gambling is a very profitable business, and Facebook looks like an ideal platform to make big money from online betting. People trust Facebook due to its size and global popularity, so the company is in a great position to make online gambling a social experience, adding considerable value to the platform and making some money for investors too. The regulatory environment is one important limitation for that business, as online gambling is still illegal in most countries.
Online commerce could be another very profitable business for Facebook; the company has integrated its platform with Amazon (NASDAQ: AMZN) and EBay (NASDAQ: EBAY) to a large degree over the last few years, and that sounds like a smart move. Facebook could collect a small fee for transactions done via its platform, and it could also benefit materially via advertising from its relationship with Amazon and EBay.
Amazon is one of the companies using “sponsored stories” on Facebook, which is an advertising product that turns “likes” into ads delivered to that person's friends, which seems like a good alternative for the online retailer. If you see that a friend with similar interests likes a book, for example, that could be a good indication you might want to buy it for yourself too.
Facebook could leverage the social experience when it comes to online shopping, and it could also provide targeted advertising for different sellers on a platform like EBay. When you have a lot of information about user´s buying habits, delivering the right add to the right person at the desired time seems like a much easier task. The timing of the ad can be quite effective for online commerce too, since it's seen by users while they are online, facilitating the process of a purchase via internet.
Facebook has some really interesting opportunities for monetization in areas like advertising, online gambling and ecommerce, and investors should watch the company closely for possible hints about the future of the company in regards to monetization. But until the social network can deliver a viable strategy for growth and profitability, the real catalyst for better returns is just not available, at least for now.
acardenal owns shares of Google. The Motley Fool owns shares of Amazon.com, Facebook, Google, and LinkedIn. Motley Fool newsletter services recommend Amazon.com, eBay, Facebook, Google, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
