Facebook hits a speedbump; stock at all time low

  • BACKGROUND

Facebook (FB) piled a huge amount of data on investor’s lap this past week in the wake of its quarterly earning results. What presented a huge qualm to investors all over was that FB offered no financial forecasts for boosting potential advertising. This sent the stock ailing to a all-time record low of $24, from a haphazardly executed IPO price of $38 in May. Foreshadowing this slipshod of an IPO, FB saw break-neck growth in the double to triple figure category. At the time everyone looked up with glee at the dawning of the tech companies IPO, but we see all hope is slowly turning gloomy. Behemoth funds, such as Fidelity, saw their investment shed by a huge amount – nearly $106 million in losses. Even the founding chief executive, Mark Zuckerberg, saw 2.4 billion of his investment worth go up in a wisp of smoke.

As doubts continue to balloon, the heat of all the claims and worries are directed towards the leader of the boat – Mark Zuckerberg.

  • THE NUMBERS
  1. FB has a share price that is 50x the earnings. A very ‘anti-value’ position, the stock looks extremely expensive.
  2. The company reported a net loss of $157 million.
  3. Revenue increased 32 percent in the second quarter to $1.18 billion, a hair above analyst forecasts of $1.15 billion.
  4. Cost and expenses ballooned by almost 300%, to 1.93 billion – largely because of restricted stock units that were not recognized before its IPO.
  5. Ad revenue grew by 28% to $992 million.
  • ANOTHER CAUSE FOR THE UNPRECEDENTED SLUMP

Zynga, a social gaming leader, account for over one-tenth of FB’s revenue and confronts the same challenge of procuring profit off their mobile users. On Wednesday, Zynga made a very surprising move by slashing its 2012 earnings forecast. This itself helped wipe 9% of FB’s value.

“Zynga and Facebook were among a bevy of hot tech prospects that went public in 2011 on the back of renewed dot-com mania gripping Wall Street. They, along with fellow 2011 debutante Groupon Inc, have since gone into a tailspin.” – Reuters.

  • MOBILE USERS ON THE RISE

Monthly active users grew to 955 millions, and large share of that growth has taken place in the mobile user space. Mobile users surged to 543 million, a staggering 67% gain. What is particularly worrisome here is that FB does not have enough advertising embedded in mobile devices. FB needs to really run for the buck now; they need to tighten the screws for the mobile advertising to really make the most of it. Otherwise a chunk of potential revenue could be lost.

The questions is not ‘how to get more users?’, but rather it is ‘how to effectively monetize those users’. In other words: How to effectively convert the users into money?

  • INTERESTING STATS

Slide in the quarterly earnings report:

FB Monthly Active Users (MAUs) by region.

If you look above, just two years ago US and Canada made up 30 percent of the MAUs. But if you fast-forward to today, that number has plummeted to a mere 20 percent.

So how does that matter, you may ask?

Well, check out this other slide:

Both US and Canada are producers of the most revenue! The “rest of the world’ which has the most ‘Month Active Users’, is actually providing the least revenue.

If you do the math:

  1. US/Canada: $3.20
  2. Europe: $1.43
  3. Asia: $0.55
  4. Rest of world: $0.44

So the problem arises – monetization of the ‘rest of the world’ chunk. When you talk about it, it might look very doable. However, in reality it is extremely difficult for FB to reach out so far. Europe could be feasible, and FB could make the effort the bring up a few offices in London and maybe France. But if you see Asia and the Far East, its very tough. FB had taken a long time to expand to the entire lengths of US, and talking about expanding and monetizing the ‘rest of the world’ could be a HUGE leap which is not in their books right now.

  • WHAT IS FACEBOOK DOING?

But they are working on it…

“At this early stage of our growth, investment is a top priority as opposed to managing for a target margin,’ said CFO David Ebersman

Mark Zuckerberg stated, in an interview, that FB would be focusing on the mobile business more now since the active users using handheld devices has skyrocketed by a large degree.

…And I hope they do.

References

http://www.reuters.com/article/2012/07/27/us-facebook-results-idUSBRE86P1LT20120727

http://m.theglobeandmail.com/report-on-business/top-business-stories/facebook-fumbles-by-the-numbers/article4442836/?service=mobile

http://venturebeat.com/2012/07/26/facebook-us-and-canadian-users-are-now-the-smallest-regional-group/

Images:

http://venturebeat.com/2012/07/26/facebook-us-and-canadian-users-are-now-the-smallest-regional-group/facebook-active-users-2012-q2/

http://venturebeat.com/2012/07/26/facebook-us-and-canadian-users-are-now-the-smallest-regional-group/facebook-revenue-by-geography/

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