A Smartphone can Make Things Much Worse
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As bad as things are for Facebook (NASDAQ: FB), it could get much, much worse for the social media giant if it introduces a smartphone to the market, as is widely rumored.
While Facebook has a myriad of problems, this event could certainly not result in anyone calling the company management a bully. Introducing a smartphone will place Facebook, mano a mano, against the likes of Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Google (NASDAQ: GOOG) and possibly Amazon (NASDAQ: AMZN), among many others. It is very difficult to figure out the competitive advantage of Facebook in that industry or the consumer demand that needs to be filled that all of the others are missing.
A major problem that Facebook has with the investment community, at present, is that it cannot be determined what its core business function will be. Very telling in this regard is that after Facebook plunged from its recent earnings report, none of the financial institutions that participated in the initial public offering or the analysts covering the stock have released buy recommendations with higher price targets. Year to date, Facebook is down 45.80% and a single sell recommendation has not been issued, either. Direction as to what to expect from Facebook is sorely lacking, including guidance from company management in its earnings call.
Introducing a smartphone will make even more feel that an investment in Facebook is in a company without a core focus. The two companies in the world that sell the most mobile phones, Samsung and Nokia Corporation, have been doing this for a long time. In addition, each is a high tech communications company at its core. The business model for Facebook is contingent on advertising revenue. Michael Pachter of Wedbush Securities observed that, "I think Facebook is going to be a mess until the lock-ups are done. Nobody trusts their shareholders, the insiders, the VCs and the way they behaved in the IPO-greedily." Bringing a smartphone to the market will do nothing to restore investor trust in the management of the company.
While it may seem logical for Facebook to have its own smartphone to enhance mobile marketing revenues, it is not. Yes, mobile market revenues are exploding, but so are the companies in the field that have this as the main business function. For Facebook, a smartphone will be a sideshow competing in two of the most difficult sectors: advertising and smartphones. For proof of this, check out the collapse in the share price of Nokia Corporation, down 46.86% for 2012; and read of Microsoft having to write off its $6.2 billion acquisition of aQuantive, an advertising company.
A smartphone entry from Facebook will serve to further degrade the image of the company even more before the investment community. For Facebook to succeed as a smartphone company, it would have to sell the product very well from the start. Within a very short period of time, there will be new offerings from Apple, Microsoft, Samsung, Google, Research-in-Motion and possibly Amazon hitting the marketplace. Samsung just announced that the new Galaxy Note will be out on August 29. Every conceivable price point and market sector is covered as the iPhone 5 will cater to consumers and the Blackberry 10 will pursue the business segment. In addition, every avenue for distribution is saturated as Apple dominates the retail sector and Amazon is patently the on-line heavyweight with its consumer electronic sales increasing. Microsoft and Google obviously have a strong presence on the Internet, too.
Facebook is trading in the low 20s, about half its initial public offering price of $38. Beginning in mid-August, there will be even more downward pressure exerted on the price as 1.7 billion more shares of Facebook will be flooding the market until mid-November as the lock-up periods expire. Facebook should adhere to a very tight, disciplined business model of developing its core operations to build trust with the investment community. In no way, shape or form can that in any way possible be conceived to entail entering the smartphone market.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Facebook, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, Facebook, Google, and Microsoft. 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.