Facebook came swaggering to the public markets in May, promising to ignore the short-term interests of Wall Street so it could build a great company for the future. Just hand over the $16 billion and leave the rest to those crazy idealists in Menlo Park.
Well, we all know how that worked out. The social media company stumbled into the market, crushing small investors who thought they were feathering their nests with a sure thing. Everything that went wrong could and did. To recap: The week before the IPO, Facebook hinted in a regulatory filing that disappointing revenues lay ahead, the result of heated growth in mobile users; GM pulled its $10 million in advertising just days before the IPO priced; and Nasdaq fumbled the open, unable to handle the onslaught of buying and selling. Today, Facebook shares trade around $27 or $29, about 25% below the initial public offering price of $38.
Now some are wondering whether its second quarter earnings, due after the close of the market today, will give investors confidence that the company can both get back its mojo and maybe, for a change, show a little humility in the conference call at 5 pm ET. Analysts said they were expecting Facebook revenues to rise about 30% to $1.16 billion and net income 12 cents per share, according to a Bloomberg survey. But many are bracing for weaker results: After the market closed Wednesday, Facebook’s No. 1 game supplier Zynga released shockingly poor results. And earlier this week, a CBS analysis of a recent report from research firm comScore reveals that unique visitors on Facebook fell 5% in the U.S. (its most profitable region) over the past six months. (The earnings report will also include a one-time hit for the cost of share-based compensation expense.)
Some investors are unfazed. Bo Brustkern, founder of the Denver-based research boutique Arcstone Partners, says Facebook is likely to “underperform for a long time.” Nonetheless, he says Facebook has the potential to churn out blockbuster profits down the road, and values the company at a whopping $58 per share, the highest among his peers.
Here’s what the pros will really be watching for:
Revenues from mobile. Facebook launched its advertising tool kit for mobile users only in March. So no one expects revenues to account for a big chunk of the business — yet. But they will be looking for anything that indicates that the mobile strategy has legs. Robert Peck, president of CoRise, an investment boutique in New York, says he will want to know more about “click-through rates” — an indication on whether users are looking at the ads. “Engagement” is another key buzzword here. How strong is it? In figuring out whether brands are getting their money’s worth, companies want to know whether users are spending more than 30 seconds on the site and if they are buying anything, says Sacha Xavier Reich, a partner for neo@Oglivy in New York. That’s particularly important on mobile because many click-throughs on smartphones are “fat finger” errors — the screens are just so small.
The early buzz is good. Recent industry studies say that Facebook mobile ads have not only higher click through rates but bring in more than 11 times the revenue of a desktop ad. Peck is bullish on Facebook stock — he expects it to hit $80 in the next few years — despite modest expectations for this earnings report. Peck has skin in the game, with a small stake in his personal account, currently at a loss.
Dispelling the GM curse. Rob Leathern, CEO of social media advertising agency Optimal, in San Francisco, says the GM deal was a red herring. He, like many others in the field, blame GM for the fiasco, plus basic mismanagement of the account. “Everyone who is a consumer brand has to be investing in understanding this stuff,” he says. Companies that want to rise above the noise on Facebook can’t just grab a fan page for free and expect results. “Unless you understand the paid media, you won’t get full value.” Investors will be want to hear more about this on the conference call. And, by the way, Facebook and GM are talking about rekindling that paid advertising relationship.
About that conference call... Facebook has been awfully cagey about whether Mark Zuckerberg will deign to show up. And that’s a bad sign for investor relations. The conference call is Facebook’s big opportunity to eat some humble pie and apologize for slamming investors — who are undoubtedly their users. In a pre-IPO letter to investors, Zuckerberg spoke about the company as a social mission, not a business. That struck a chord with some but sounds a bit hollow after the company seemed to squeeze every last penny from investors — especially since many feel Facebook only reluctantly agreed to sell shares to the public in the first place. Zuckerberg did little to dispel that impression when the top brass were trying to woo investors to buy the stock before the IPO. He kept a roomful of 500 people waiting in New York, made them sit through a promotional movie available on the web, and took only a handful of questions. If Zuckerberg has a great story to tell, he should share it — and today would be great time to do so.
Is the Facebook ecosystem viable? Advertising is top of mind, but Facebook is — in theory, at least — so much more. There are games, for example. A Facebook exec was bragging recently that the company is home to 130 games with more than one million monthly active users, the Huffington Post reports. That was before Zynga reported its poor results yesterday. What a funny coincidence that Facebook was telegraphing that Zynga isn’t the only game maker in town, although, of course, it did account for 15% of Facebook’s revenues last quarter (down from 19% in 2011) and its 243 million user base is bigger than the next five combined. So Zynga remains a weak link, despite Facebook’s efforts to distance itself from the struggling game designer.
The ecosystem question, part 2. Rumors are flying that Facebook plans to square off with LinkedIn in job search. And there’s buzz about a search engine for the site. Can’t remember who recommended that restaurant in Paris? Wouldn’t it be nice if Facebook had a search solution for that? Financial services remain on the to-do list. And there’s always a hum about a cellphone to rival Google’s Android. “Facebook has the potential to be a platform like Google or Amazon in e-commerce. Entire ecosystems are being built off the core that Facebook is creating,” says Arcstone’s Brustkern. And then there’s that social photo-sharing system that Zuckerberg bought for a billion dollars without consulting his board. “Instagram hasn’t even closed yet,” notes Robert Peck of CoRise.
We may or may not learn a lot about these issues later today. In the meantime, the barrage of bad news hasn’t put off Ben Rogoff, director of technology investments for Polar Capital in London. “Still like the story,” Rogoff said in an email earlier this month. “The Facebook advertising/marketing opportunity looks more real than ever,” he adds, plus the company is clearly trying to develop other revenue streams. And, he says, he would consider increasing his stake if the price were to drop.
It looks as if he may have an opportunity to do just that.