The arrival of Facebook to the public markets has been one of the most commented on and hyped events in modern financial history. People marveled at the valuation, eagerly awaiting the moment when they could own a piece of the history. Stock was going social, and virals were in full effect.
Alas, things have turned out a bit differently than hoped. After releasing at 38 and rising to 43, they now reside in the low 30s. Many explanations are offered, and a lot of finger-pointing is going on – at Facebook, at Morgan Stanley, at NASDAQ. But let me tell you why it’s all going to be okay. This isn’t the end of the social world.
The Social Opportunity
It’s safe to say there were some pretty outsize expectations for Facebook’s stock. Folks have been gnashing for access for some time now, even going to the point of fostering a rigorous secondary market for the shares. I think many of the people wanted shares not because of the opportunity social represents, but because of their relative certainty that the shares were going to skyrocket. Pricing based on hype is far more subject to variance than pricing based upon fundamentals.
I’ll cop to the fact that it’s been a bit of time since I looked at Facebook’s SEC filings, but I wouldn’t look at them as particularly helpful indicators of the future. Yes, revenue isn’t the super sweet hockey stick we’re all so fond of. Yes, customer growth has slowed (perhaps they should work on getting more people Internet connections), but those are relatively poor indicators of where Facebook is likely to be in a few years. Sorry about your crystal ball bro.
Facebook really hasn’t focused on making money yet. Oh sure, there’s the ads and the game revenue, but they’re just harbingers of a much larger future. The revenue is there, but it’s not what is important. It’s about the infrastructure, the expansion of a platform that inundates our existence. A social currency that co-opts primary functions of everyday lives.
Consider this: Facebook started as a niche network for prestigious universities. It has since discarded that filter and grown to over 900 million members. But that’s not all, it has quickly laid the groundwork for the domination of a number of incredibly important markets – entertainment, advertising, information and yes, even mobile. Don’t believe me? Let’s take a look at each.
Entertainment. This one is pretty simple. Facebook launched an entirely new genre of games, one which is still very much in its infancy. Billions to be made, and I think we can envision a future where social games are extremely sophisticated and compelling (Kixeye anyone?). But social games are just a proving point for a very important concept: people are willing to spend hours a day on Facebook for entertainment purposes. That begins to make things like streaming, social movie watching and so forth pretty damn interesting. No other outlet can make the same imposition on a person’s time.
Advertising. This doesn’t need a lot of real estate. There’s a reason why the bigs are making social platforms (Google+ and so forth), and it’s because few things are more important than targeted advertising. Alas, it is very difficult to target users browsing a web page. You can make guesses about whom is searching for what, but there’s few things that can beat personal information verified by the users themselves. That’s what social advertising offers. It’s pretty revolutionary.
Information. It’d be one thing if Facebook stopped at a person’s basic credentials (name, sex, school, friends) and called it a day, but it didn’t. It has created opportunities for us to provide progressively more information about ourselves, often under the guise of utility. A great example are “Likes” which create a very valuable repository of preference information as an ancillary effect of giving us a means to share our interests with friends. Each layer of information is enormously valuable and largely underutilized.
Mobile. This is the tricky one, and it’s had a pretty significant impact on the goings on this week with the stock price. Mobile was recently cited as a “risk factor” for the success of Facebook, causing some analysts to drop their guidelines for the stock. It’s very easy to look at the booming mobile market and assume Facebook has missed the boat (even though their app is a significant percentage of mobile usage), but it’d be shortsighted.
How come? Facebook is one of a handful of companies capable of solving the biggest problem on mobile: user acquisition. A lot of folks assume that store organization is the solution to this, but that’s simply not the case. Store organization can help, but you’re naturally going to run into issue when there are 600k apps vying for attention. Even virtual stores have limited shelf space. Developers face a real problem when it comes to efficiently targeting and acquiring users – the filtering mechanism just isn’t there.
We have no solid way of knowing which users are holding which device and what those users actually care about. And so developers spend inordinate amounts of money acquiring VOLUME but not necessarily acquiring USERS. Facebook has the filtering mechanism (remember all of that guff about controlling information), and the recent announcement of the App Center indicates their serious intention to solve the problem. This is a multi-billion dollar market.
So, in summation, we’ve got Facebook positioned to capitalize on a number of enormous markets with a defendable competitive advantages. People who know me can attest to the fact that I’m not a Facebook fanboy (I’m working at a mobile company after all), but the recent hullabaloo is a bit overworked. It reminds me a lot of all the fretting about Amazon back in the days when it wasn’t making money. Strangely, I don’t hear anyone complaining now even though it’s at a 3 digit P/E ratio. Comparing Facebook’s P/E to Google’s is folly. Google has defined the market for search and the borders are relatively well understood. If you think Facebook has hit the wall on social, good luck.
JM: Yes, it needed to be said. Facebook is big and going to get bigger. However, games are a partnership. UA costs have dramatically gone up relative to revenue, causing a mass exodus except for the big dog and a few long-term believers. If Facebook can be a games platform with a handful of developers, then so be it. I agree on advertising, this is a sleeping lion that has yet to roar. I kind of agree on mobile. I have high hopes for the App Center, it’s one of the smartest moves from them in a while. I just hope it runs better than the current Facebook app!