Facebook IPO: investors yet to signal whether they are 'fans'
First anniversary as a public company is being marked but there is little joy, write Brian Womack and Nick Webb
Facebook marked its first anniversary as a public company on Friday – but investors have little reason for merriment.
Last year it emerged that staff and executives at its Irish operations had shared a €13.9m stock windfall through share-based payments. More than 42 per cent of this went to unidentified "key management personnel", according to filings.
However, despite last year's pay bonanza, Irish shareholders – which include Bono via the Elevation Partners investment group – have not done well out of the company since it floated.
Shares were down 29 per cent from the initial public offering price of $38 (€30), making Facebook the fifth-worst performer of the 124 stocks that debuted during the same period. Among companies that raised $200m or more in an IPO, it ranks last.
It could be worse: the stock has climbed more than 50 per cent from its September low and has a market value of almost $65bn – behind EBay at about $72bn and ahead of Time Warner at $57bn.
Yet a year after Facebook raised $16bn in the largest technology IPO on record, investors remain concerned about its ability to generate earnings as a growing number of users shift from personal computers to smartphones and tablets.
"The battle for this company is: mobile's growing fast, desktop is slowing," said one analyst at Macquarie Securities who rates the stock 'outperform'. "Is mobile's growth enough to make up for the decline in desktop? That's the key issue for the near term."
In January, Facebook CEO Mark Zuckerberg told analysts that "there's no argument. Facebook is a mobile company".
Facebook has introduced several mobile-advertising products, including Sponsored Stories, that allow companies to promote content that a user's friends have signalled they "like" or interacted with. With Promoted Posts, companies can highlight marketing messages to their "fans" and friends of fans.
Those efforts are making a difference. Mobile ads accounted for 30 per cent of Facebook's $1.25bn in advertising revenue in the first quarter of 2013. Next year, Facebook will have 13.3 per cent of the US mobile-advertising market – up from zero in 2011. Still, many think that share will decline to 11.5 per cent in 2015 amid rising competition, while Google, the world's most popular search provider, will continue to increase its market share every year, growing to 58 per cent in 2015 from 51 per cent in 2011.
As it struggles to make money from mobile, Facebook has to accommodate advertisers without alienating users.
"When you look at mobile there is the tension between user experience and ad inventory," said an analyst at BTIG Research who recommends selling the shares. "How many mobile ads can you put into the mobile 'news feed' before you start to irritate users?"
During a call with analysts earlier this month, Zuckerberg addressed that question, saying: "We continue to measure people's satisfaction with all the content they see on Facebook, including ads."
Last year, the company acquired mobile photo-sharing service Instagram, its biggest purchase at more than $700m. Instagram, with more than 100million users, has signalled it's open to advertising, though it hasn't said when it might introduce it.
Facebook is in talks to acquire mobile-mapping application provider Waze for as much as $1bn. With Waze, Facebook would add advertising revenue from location-based services. Facebook is predicted to report revenue of $6.7bn this year, an increase of 32 per cent from 2012.
Investors aren't getting Facebook on the cheap, even with the price decline since the IPO. Shares are trading at about 35 times expected earnings for next year, making them the fourth-most-expensive on the Nasdaq 100 index.
To impress investors, the company needs to find new ways to make money from its vast user base. So far, such revenue has come mostly from gaming companies such as Zynga.
"Long-term investors are waiting to see what else is there. Why haven't we seen more around music or video or commerce and things like that? And that's where I think that the true test of the company's worth is going to come," said one analyst,
Google remains the gold standard in internet IPOs of the past 10 years. Its shares jumped 18 per cent on the first day of trading in August 2004 and rose more than 200 per cent in the first year, as companies clamoured for its search-based advertising.
"Really, the shift to mobile caught them by surprise," said an analyst at Oppenheimer who rates the stock a buy and doesn't own it. "They've made a ton of progress. But I think it's really very early days."