Facebook Bulls and Bears
Mohamed is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On May 17 one of the most hyped and anticipated IPOs in history took place only then to become one of the worst IPOs of the decade. The Facebook (NASDAQ: FB) IPO was portrayed as a defining moment in financial history. A week before the IPO all you could hear on Bloomberg, CNBC, and the rest of the financial media was Facebook; how it was created in a dorm room, its 900 million users, what it’s worth, and how many millionaires it will create. A few days after the IPO whenever you heard about Facebook it was usually associated with lawsuits, losses, bubbles, greed, and the unfairness of Wall Street. How things change in a matter of days! The stock is currently trading 23% below its IPO price last May.
The Motley Fool has a tradition of ignoring the noise and keeping the focus on the long-term trend, so is Facebook a good long-term investment?
I particularly don't have a view on Facebook so I will give you both views and you can make up your mind. Now, let’s see what both sides have to say:
Connecting the world
If Facebook were a country it would be the third largest in the world right after China and India. Facebook boasts 900 million monthly active users and is the second-most visited site, according to Alexa, right after Google (NASDAQ: GOOG). This presents Facebook with enormous opportunity and could result in much higher profitability if these users are monetized in a better way.
Not only that, but this large number provides Facebook with a moat against competitors. Facebook in 2008 made the right decision when it implemented its new design features that moved it away from being a site focused on a user’s profile and instead focused on friends sharing content with their network. When you sign in now the first page you see is the news feed and not your profile.
People will not switch to another social network easily because all their friends are on Facebook and all the activity is taking place on Facebook. Google learned that the hard way with Google Plus. At first Google Plus was growing at an astronomical rate, trumping the initial growth rate of Facebook. However Google Plus a little while later became what many consider to be a ghost town inhabited by Google employees.
From the Ad to the Story
Just because Facebook’s ads produce a lower Click Through Rate (CTR) now doesn’t mean they have to stay that way forever. Over the last few years Facebook has gotten better and better in terms of the quality of its ads. Advertising doesn’t necessarily only mean the display ads you see on the side of your page. There have been several other products developed for advertisers and marketers, such as sponsored stories, which inform you of your friends liking something, or the reach generator, which helps companies get their message across to a larger number of their fans. The iconic Like button itself, which has become the obsession of businesses on Facebook, was only introduced in 2009.
Facebook’s vision is to move from the ad to the story and that’s exactly why they created the new timeline design, in order to help companies share their stories with people.
New Revenue Streams
Facebook’s revenue makeup in 2011 was as follows
Facebook payments and fees consist of credits, which are what people buy to acquire special items and virtual goods on games like FarmVille by Zynga (NASDAQ: ZNGA) and other applications. Facebook retains 30% of the payment made to acquire credits.
Only 15 million people or about 2% of Facebook's user base have used credits. If Facebook is able to convince more people to use Facebook for payments, it will create a serious revenue source besides advertising.
Facebook lately has decided to phase out Facebook credits as a universal currency on the network by the end of the year in favor of letting users have an account with their local currency. It will also allow subscription plans that could be used by media outlets and entertainment companies such as Netflix and Spotify to name just a few.
This move by the company is hoped to attract more users to use Facebook for payments and to diversify Facebook payments away from Zynga, which currently is responsible for 12% of Facebook's total revenue.
Notable Bulls on Facebook
Steve Wozniak, Apple co-founder: “Facebook is here to stay and is not going anywhere; I would invest in Faceboook at any price”
One of the strongest reasons to stay away from Facebook is its notorious IPO. Sergey Brin and Larry Page were lambasted for how they manged their IPO, which resulted in Google debuting for less than was possible, but in hindsight it may have been better for Zuckerberg to go with the Dutch Auction and let the market price the IPO instead of going in with an insanely high and controversial valuation. Stock prices are based on investor sentiments and if sentiment for Facebook is negative it will be punished with low valuations. Given that the valuation they went in was considered off the charts already, Facebook’s stock may drop even further.
The Threat of Mobile
Facebook has stated in its S1 filing that it's having trouble generating revenue from mobile. Unfortunately, mobile is the future, so if Facebook doesn’t learn to operate on mobile effectively then Facebook might not have a future. This is what Facebook had to say in its S1 regarding mobile:
"We had more than 425 million MAUs who used Facebook mobile products in December 2011. We anticipate that the rate of growth in mobile users will continue to exceed the growth rate of our overall MAUs for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. Although the substantial majority of our mobile users also access and engage with Facebook on personal computers where we display advertising, our users could decide to increasingly access our products primarily through mobile devices. We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven. Accordingly, if users continue to increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, our revenue and financial results may be negatively affected."
Falling Revenues per User
There has been a frightening trend in Facebook’s Revenue per User data. New users that are being added are producing less revenue. If this trend continues then so much for user monetization.
Google Vs Facebook
Some predict that Facebook will never be able to compete with Google in terms of advertising. The reasoning for this is as follows:
Google tracks what you do, Facebook tracks what you like. Just because you like something doesn’t mean you actually do it. For example I found out that one of my page likes is "Dubai Property," however I never have actually been to Dubai nor do I have plans to move there in the near future.
In the case of Google people search for a lot of things that not only interest them, but that they actually do. For example if you search for hotels in Fiji, there is a big chance that you are planning a trip to Fiji.
Google is also more effective in driving search users to businesses' websites and is much more helpful to e-commerce as of now. Say you are interested in leather boots and may consider purchasing a pair, you can type "leather boot" into a Google search bar and an Adwords advertisement from Zappos that links to Zappos' website. You find a pair that you like and you make a purchase. Facebook's pages and ads cannot currently offer the same ROI to Zappos.
Notable bears on Facebook
Bill Gross, PIMCO co-founder, on the IPO day: I don't know how to use it but I know a bubble when I see one!!!"
So what do you guys think? Are you with Steve or Bill?
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