MorningWord 11/18/13: By all accounts Facebook put up a big Q3 when they reported on Oct. 30th. Upside in daily active users, mobile usage and mobile revenues nearing 50%, operating margins jumping 7% year over year to 49%. Despite continued execution on their plan to monetize the growing mobile user base, the stock has been stuck below the levels it traded at prior to the earnings print largely due to their mention of slowing usage among young people and the company’s reluctance to boost ad loads in users’ Newsfeeds which has largely been the reason for revenue gains in the last couple quarters.
If you are one to look at FB’s shares with a bit of skepticism, those two points above that the company pointed out as concerns in a very forthright manner on their earnings call should be the cornerstone of your bearish thesis.
First things first, the youth issue is an issue because on FB’s Q2 call, CEO Zuckerberg stated (via Techcrunch:)
“based on our data, that just isn’t true.” Zuckerberg said on today’s earnings call that “we believe we have close to fully penetrated the US teen demographic for a while,” and that teens remained steadily engaged with Facebook this year.”
But let’s take the convo back to just before FB’s May 2012 IPO as the company spent $1 billion to buy Instagram the photo sharing network with 13 employees and no revenues. This was fairly eye-popping and in some ways might have helped to destabilize the bullish thesis leading up the IPO and causing a bit of the volatility immediately after as some investors might have questioned FB’s ongoing positioning in the quickly changing social media space. Fast forward 18 months and the move in hindsight was genius, and some are calling it their “Trojan Horse” with the youths today. If Instagram had fallen into the hands of Google or Yahoo, FB might be in a far bigger pickle as they are scrambling to attract and engage younger users. Which is why last week’s WSJ report that FB tried to recently buy short message social network Snapchat for $3 billion made sense so soon after the company acknowledged that they “did see a decrease in daily users specifically among younger teens” on their Q3 call on Oct. 30th.
I suspect these flavor of the month social networks will continue to be aggressively courted by the likes of FB, MSFT, GOOG, YHOO and TWTR, and I would expect the prices to be paid to hit some fairly silly levels for company’s with no revenues and executives that still use a boatload of Clearasil face wipes on a daily basis.
IF FB can’t figure out the “teen thing” they could very well go the way of Myspace, and one 13 year old last week on her Mashable account offered a fairly obvious but interesting assessment of what the youths today want in a social network titled “I’m 13 and None of My Friends Use Facebook“. As a father of soon to be teenage girls who have connected devices I think it is safe to say by their initial forays on the web that they have little interest in Facebook, but both want Instagram accounts.
The other pillar of the bear case is that advertising in social networks may suffer the same fate as banner ads did more than a decade ago, which for all intents and purposes caused the real death of most of the dot.com bubble companies back in 2000. While FB has had its share of issues relating to privacy of users data of the last few years, users should be fairly happy that the company has decided to keep the ratio of ads in the Newsfeeds at about 1 per 20. While this is less intrusive for users, this was not met well with investors who see this as the primary driver for revenue growth. This will be a work in progress to find the proper equilibrium, but I suspect when the social media bubble bursts (and it could go on for years) backlash against inserted ads will likely be the culprit.
Ok, that’s the fairly well known bad news at this point, but as some bullish analysts have pointed out, per Business Insider quoting Citi analyst Michael May, the company has many drivers to pull in the near term for revenue growth:
- Instagram ads. Facebook hasn’t really started monetizing this monster asset, but the potential is big.
- Facebook video ads. As with Instagram, there’s virtually nothing now, but this too could be good. See our post from August on this topic.
- Increasing the fill rate. May notes that on Facebook, about one out of every 20 items in the newsfeed is an ad.
- Launching an ad network. Facebook hasn’t yet launched, or even talked about, an ad network on other sites that uses Facebook’s knowledge of users, but the potential is there.
- Facebook ad network could add an incremental $109mm, $263mm, and $417mm in revenue upside to current estimates.”
Facebook is still the largest social media company in the world, and by far the largest market cap company in the sector ($122 billion). Its many advantages are well known. But as it searches for incremental revenue streams, there are a few budding risks. Facebook is trying to use its pocketbook to nip the competition in the bud. Whether that works in the long run is much less clear.