Facebook (NASDAQ:FB) has been a publicly traded company for nearly a year now, but its performance has been anything but astonishing — unless a lack of success can be termed astonishing. Since its stock market debut, the social network’s shares have been unable to get back to to where they started.
Facebook shares slid from over $38 per share on May 18, 2012, to less $17.55 per share in early September last year. The shares have slowly been working their way up since then, but there’s been a struggle to get much higher than about $27 per share, as the stock has been floating mostly between $25 and $30 per share since December of 2012.
There are 5 key things Facebook will need to do to show in its earnings report — scheduled for release after markets close Wednesday — to prove to investors that the company is a worthwhile investment.
Facebook might have started out as a web application for people to use on their desktop and laptop browsers, but the paradigm is shifting, and Facebook has to prove that it knows where to pool its efforts. PC shipments have been declining lately, while smartphones and tablets have been growing in popularity. To stay relevant, Facebook has to stay where the users are.
In its third quarter of 2012, mobile ads made up 14 percent of Facebook’s advertisement revenue, or $153 million. The company managed to increase that sum by 23 percent, to $306 million, in the fourth quarter. Sterne Agee analyst Arvind Bhatia believes Facebook can prove to do one better for the first quarter with $360 million in mobile ad revenue, or 25 percent of the total ad revenue. If Facebook can show it has its priorities straight and knows how to continue increasing ad revenue, it might be a good sign for investors.
It’s one thing for the company to prove that it can increase mobile ad revenue. It’s another thing for the company to show overall increased revenue. As noted earlier, Facebook would be in a good position if it could show mobile advertising generating just 25 percent of its total advertising revenue. But, Facebook would still have to show other means of generating revenue.
Facebook has been suggesting lots of new changes to the way it pulls in advertisers. In some areas, like on the new Facebook Home app, it’s been keeping advertisers out, but it has been creating new opportunities for advertisers in other ways. Video ads are one possible way that the social network giant can command higher prices for advertisements. It has also been toying with a special advertising tools and options that enable advertisers bid on advertising space in real-time on the Facebook Exchange.
One trouble for revenue growth in the quarter might come simply from the time of year. Though advertising revenue has been growing — as seen in mobile — in the third and fourth quarter, the holiday season has ended, leaving advertisers a little less aggressive about getting ad space.
If Facebook wants to have anything happen, its got to have users. Advertisers won’t be interested in paying high prices if there is nobody looking. Though Facebook isn’t in danger of losing 100 percent of its audience anytime soon, it does seem to be having a big of a struggle.
According to the analyst firm SocialBakers, Facebook lost 6 million users in the U.S. in the last month. This wasn’t the only location for users to decline. There was a 1.4-million-user drop in the United Kingdom in the same period. And it hasn’t just been the past month; the number of departing users over the past 6 months totaled about 11 million in the U.S. and UK, and that doesn’t include the losses in Canada, Spain, France, Germany, and Japan.
In a lot of areas, Facebook is beginning to feel saturated, as many users who are interested in Facebook have already signed up. Facebook will have to prove that it can maintain its user base if investors are going to believe it is safe.
While there’s a definite concern over how much Facebook can pull in, there may be a bigger concern about how much money the company is spending on projects and staff — aimed at boosting revenue — without a guarantee that there will be a return on investment.
In the fourth quarter, Facebook’s profits dipped 79 percent, as expenses rosen 67 percent to $849 million, excluding stock-compensation-related charges. The reason was likely tied to hiring and increased infrastructure spending.
The company said that it expects expenses to increase 50 percent this year. Chief Executive Officer Mark Zuckerberg said Facebook will “continue to grow [its] headcount quickly” and “at a faster rate” than sales. While this could could put Facebook in a good position down the road, as the employees can help the company innovate and keep up with the ever changing media world, it could be bad in the short term as investors are concerned about the company’s shoft-term profits.
One significant need that could tie together a lot of Facebook issues into a nice solution is key products. In order to keep users, Facebook has to have things to excite users, to keep them browsing the site on their computer, and scrolling through the app on their mobile devices. New application can do just that — things like Facebook’s Graph Search and Facebook Home.
Hot features and applications are a double whammy, as they aren’t likely to only increase consumer use, but also to increase advertiser interest. If Facebook Home proves to get a lot of attention from users, advertisers may try to target it, which could allow for Apple to increase ad revenue.
However, Facebook has a lot to prove in this regard. The user exodus makes it clear that Facebook is having trouble keeping users engaged with its current set of features. Also, Facebook Home has only a 2-star rating out of 5 stars on Google’s Google Play app marketplace with over 14,000 reviews. It also has only 1 million downloads — less than 1 percent of Facebook’s total user base.
Zuckerberg said, “aside from ads, I do want to temper near-term expectations a little bit on revenue lines coming from other areas, like Gifts or Graph Search,” suggesting that he is aware the company’s products are not yet producing exciting results.
Facebook clearly has a lot of things it has to do to get the faith of investors, and it looks like it might fall short in some regards by the time it reports earnings on Wednesday. There isn’t much time to turn around user exodus and weak products before the earnings call, so many of the improvements may need to be pursued over the next several quarters before Facebook presents a strong, investment-worthy image of itself.