Facebook Spots Iceberg on Voyage
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Facebook (NASDAQ: FB) has been a tricky investment since its launch, no doubt about it. The initial launch included a drop in a third of the company’s value, shortly after posting a record opening, passing General Motors (GM) in volume.
But just as the Internet, which gave birth to Facebook, changes rapidly so too does the market it lives in. On 17th August, the lockup period on Facebook’s original IPO ended for a significant portion of shares. What’s that you’re asking? Hold up – you mean there may still be people looking to sell Facebook stock? The simple answer is yes, in order to secure a healthy IPO and avoid manipulators (which happened anyway), companies may require that potential shareholders agree to not sell their newly acquired shares, for a specified time period.
On 17th August, one of those lockup periods ended and it didn’t spell well for the Internet giant. Shares of the record breaking stock tanked, falling 6 percent by the end of the day, to $19.87 the lowest point so far. To complicate matters, a further 2 billion shares will become available for sale this week running through May, with the largest in November. To put this in perspective, 271 million became available when the 6 percent loss occurred.
This complicates matterrs all the more for the social media empire that built a name with 800 million active users, the largest personal data collection in history. Still, the company has failed to successfully monetize its platform, reporting a loss of $157 million down from $240 million the previous year. Part of the blame was placed on mobile ad revenues, which have struggled.
Furthermore, the German government has issued an investigation into the collection of private data. The investigation specifically pertains to the company’s use of facial recognition technology that scans users’ faces and collects data. German officials allege that the scanning is done without users’ permission and violates their privacy. In Europe, data collection laws specifically require user consent.
Because Facebook’s European operations are based in Ireland where no specific law exists, the company maintains the practice is in fact legal. The company released a basic statement on the issue:
“We believe that the photo tag suggest feature on Facebook is fully compliant with E.U. data protection laws,” the statement said. “During our continuous dialogue with our supervisory authority in Europe, the Office of the Irish Data Protection Commissioner, we agreed to develop a best practice solution to notify people on Facebook about photo tag suggest.”
The move, if successful, which seems unlikely given Facebook’s global presence, would place a significant stranglehold on a bucket of potential profits. Consider the following scenario: You are at a party and snap a few photos of some friends drinking. Once the photo is taken, the Facebook app asks if you would like to tag the recognized faces, you reply yes and everyone knows your immediate status. The good news is the bar owner now has you and your friends as free brand ambassadors for its mobile advertising campaign.
I can see people getting upset about their photos being published instantly for advertising, and the unrolling of such a hypothetical feature would turn heads. But the potential for finally monetizing mobile advertising would at least be there for the struggling giant.
Another major partner in the business, Zynga (NASDAQ: ZNGA) posted poor revenues of $332 million, below analyst expectations. The funny part is the company attributes some of the loss to Facebook changing its platform. For Facebook the majority of profits are earned from ads, the remaining are from store credits purchased by Zynga users playing popular games like Farmville.
Because the company is beginning to see sharp declines in stock value, it is going to have to find ways to sell ads and prove their ads are worth more in price than other forms of advertising. At this point, the more shares that become available to sell the quicker investors will dump the stock, potentially turning Facebook into another AOL.
muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook. Motley Fool newsletter services recommend Facebook and General Motors Company. 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.