By Lior Alkalay
eToro Research Analyst
No doubt we all remember well the events of May 18th 2012, when the most promising IPO in the last several years finally took off. This was, of course, Facebook (FB). The Facebook road show enthralled us every step of the way, from the first “breaking news” that the company intended to go public to the actual launch of the IPO. It was all incredibly glamorous and exciting. Flavored with the mysterious character of its founder Mark Zuckerberg and coated with a flurry of Hollywood stardust (after the movie "The Social Network"), investors and Facebook users were almost unanimous in their certainty and glee, that this – Facebook – was to be the next Google (GOOG) or Apple (AAPL). All that hype did not escape the greedy eyes of Wall Street which, well ahead of the IPO launch, drove the target price higher and higher until the Facebook IPO was the largest Tech-based IPO in history, with the company on track to raise capital of approximately $100 Billion. But the reality of the launch was a slap in the Facebook. The company’s first experience as a public company didn’t remotely resemble the glitz and glamour of a Hollywood premier, but an all too graphic montage of a feeding frenzy in shark-infested waters. The Facebook stock price plunged 52% from its initial IPO price of $38 all the way to $18.03, wiping out more than $50 billion in Facebook’s value.
It’s the Mobile Stupid!
So what happened exactly? What made investors and the Street throw Facebook shares away like it was a hot potato? They were selling off without even the slightest of indication of bad news. At first glance, this might be due to the company’s profitability issues; Facebook is much more expensive than its social peers when considering earnings multiples. Facebook is trading at a P/E ratio of 40X while its peers, Google and Apple, trade at 16X; Facebook’s much higher ratio is an indication of its high growth expectations. Instead, Facebook’s ad impressions grew only 18% in Q2, a hard fall from the 32% growth in Q1, which was extremely disappointing news for a company that is “supposed” to be the next Google or Apple. At only around 5%, Facebook, in fact, has failed to gain market share in the online advertising space, as compared to Google which controls more than 50% of online ads alone, and more than all of its competitors combined. As if that’s not enough, a recent report from Barclays suggests that there is still much more work ahead for social media to prove their worth. Following an extensive survey done by the investment house it seems that big advertisers are skeptical of the effectiveness of social media advertisements, and question the return on their investment. In my mind, the results of that survey are cause for great concern for the likes of Facebook and other social networks.
But that is only a part of the story. The other big reason why Facebook is being so viciously hammered by Wall Street is the Facebook mobile miss. Facebook’s main competitor, Google, has clearly taken the mobile market by storm with its Android operating system (the #1 mobile platform) and user-friendly Apps such as Google Wallet, Google Drive and even Chrome for iOS system. To put it kindly, Facebook has lagged far behind; to put it less kindly, however, it would seem Facebook management missed the mobile revolution. But this was not a simple, just-off-the-bulls-eye kind of miss; this was a miss of titanic proportions that Facebook management could ill afford. While Facebook’s competitors were fiercely engaging in the dominance of the mobile world, Facebook’s mobile app was by comparison so slow and immature that end-users voted with their fingers and turned to other mobile apps.
But this is not where the Facebook mobile saga ends, unfortunately. According to tech analysts, Zynga (ZNGA), the social gaming company that draws the bulk of Facebook’s payment revenues, is expected to see a decline of 6 million daily active users by the year end in favor of mobile gaming. Like Facebook’s miss, when it comes to mobile applications, all of the other big gaming companies are leaving Zynga in the dust, thus further shaking the foundations of Facebook’s revenue stream. Just two days ago, the world’s biggest game makers gathered in Tokyo and more than 40% of the exhibitors presented a strong mobile presence to the 200,000 visitors (20% more visitors than last year). Guess what was missing?
Should Zuckerberg Go?
Some might argue that Facebook is still a young and dynamic company which has just had a couple of misses. But we argue that is not the case; the company is on a path of decline and there are several reasons why I believe that.
- The company failed to get a solid hold of mobile users by missing the shift to mobile.
- Though it’s the second most visited website in the world with 500 million users, the company not only failed to gain a significant share of the advertising business they weren’t even able to achieve a double digit share.
- Furthermore, the company failed to establish a stronger presence in the mobile gaming industry.
- More importantly, the company failed to deliver a reliable strategy to monetize its gigantic user base.
- Last but not least, the company did not use its vast amounts of cash to buy into market segments it didn’t already have a strong presence in; the cash purchase of Instagram came only out of a fear of losing dominance in its photo sharing business.
To put it simply, Facebook needs a more aggressive management; one that will lead aggressive takeovers, create strong pricing models and build a stronger foundation for the company so that it can dominate market share rather than further erode the crumbling revenue base it has now. In other words, Facebook needs a new CEO. Undoubtedly, without Mark Zuckerberg, Facebook could not have become Facebook. Also undoubtedly, Mark could and should continue to play a prominent role in the company. But unless and until Facebook hires a true professional, a high profile CEO – an Eric Schmidt kind of CEO – then the company will eventually be forced to the margins by its fierce competitors, Google and Apple. Will that happen and restore value in the world’s largest network? Only time will tell.