Questionable Future for Facebook
By Aleksandra Neizvestnaya
Facebook tried to pull off being the company that believes “in something beyond simply maximizing profits,” in its IPO filing in early 2012. However, it soon learned that it could not just live off of this motto. Months after a botched IPO and a falling stock price, investors were worried about the potential of Facebook. In its third quarter earnings call in 2012, Mark Zuckerberg, Facebook CEO, greatly emphasized the fact that “monetization needs to be integrated directly into the core product experience.” Now each of its product teams was responsible for coming up with a revenue strategy for their respective product lines.
Mobile monetization, which is the ability to generate revenue through mobile apps, has been the most important and successful driver of Facebook the past year since going public. In its 2013 third quarter report, mobile advertising represented 49% of total advertising revenue, up from 41% in the second quarter, and just 30% in the first. Also, mobile users are becoming a large part of its total users, making up about 69.6% of total Daily Active Users.
Sure, Facebook’s growth trend is making Wall Street tremendously happy, but for how long? Even a big-time investor like Warren Buffett decided to act cautiously. Buffett advised Zuckerbeg on the IPO, but chose not to buy in to the social networking space. User-based companies are still a mystery for investors, especially with so many infamous examples like Netscape, Myspace, and AOL. How can we really value the future of Facebook? We saw that the $104 billion intrinsic value it had before its IPO wasn’t completely justified in its first year. Not to mention the JOBS Act that Obama signed in 2012, which loosened regulations allowing companies to file for IPO without public disclosure or review.
Speaking of intrinsic value, we can look back to about a decade ago to the dot-com bubble. Companies like Pets.com, which had a valuation of a multibillion-dollar company, went bankrupt because its true value was far less than the stock price indicated. Now most of the tech companies coming into the publicly traded world are starting off just like that; being valued extremely high before having shown any profit. Just in the last month, Snapchat, the two year old company that uses quick-disappearing photos to attract users, rejected an all-cash $3 billion takeover offer from Facebook. So a company that has absolutely no revenue wants more money? If this isn’t deja vu for investors, I don’t know what is.
Facebook’s third quarter results showed $2.02 billion in revenue and $9.3 billion in cash and investments. Revenue has grown about 60% since a year ago, and the stock price has increased by more than 100%. So, I’m not saying that Facebook is all bad. Revenue is estimated to grow to $2.33 billion at the end of the fourth quarter according to 36 analysts. Short-term investment is a total buy looking at current headlines, but I wouldn’t rely on it in the long-term, because let’s face it, its revenue is almost completely dependent on advertising, and where the users go, the advertisers will follow. Unless Facebook has some out-of-this-world product up its sleeve or a plan to move to bigger platforms, it’s not giving us much promising potential into the far future.
In the company’s latest earnings call, CFO David Ebersman noted the decline in daily users among younger teens and stated that Facebook does not expect to “significantly increase ads as a percentage of News Feed stories beyond where we were at the end of Q3.” After blowing away Wall Street’s expectations this past year, this news left everyone puzzled. After this release, the company’s November stock see-sawed between $46 and $50, some days ending below $45.
If young teens leave Facebook, it is worth it to rely on the older crowd? But besides the dwindling user-base, what proof is there that the company will be able to keep up its revenue? In the company’s last earnings call, Zuckerberg talked about building “more efficient technologies and services,” and then says that what they invest most in is the News Feed. What makes the News Feed better than Yahoo News, or even Twitter. As far as I’ve seen, the News Feed is filled with your friends and family sharing their photos, opinions, and daily life issues. At least Yahoo News compiles national and international news, and Twitter lets organizations and officials post real-time world activity. Even so, I’m not saying that Twitter will prove to have better revenue growth than Facebook.