Facebook (FB) is finally starting to communicate more freely with the outside world. After a grueling and embarrassing period, when FB’s stock price dropped precipitously and analysts began to question its business model, Sheryl Sandberg, chief operating officer, has gone on the offensive.
This is a marked turnaround from the company’s “don’t sweat it” method of operation up to this point, when it continued to tell the investment community to trust management. But, was Sandberg successful?
A New York Times article reported on Sandberg’s presentation to the Advertising Week conference. FB’s mantra is that it can effectively get the message [of advertisers] to its one billion users in a way that profits the advertisers and FB. This is at the heart of the pressure being felt by FB to increase ad revenues, its primary source of income. “Rather than just talk at large groups of anonymous people, businesses can relate to a consumer and establish an ongoing relationship. And importantly, that consumer has an average of 130 friends ... [that might also be interested in a product].”
During the presentation, Sandberg “played down the company’s falling stock price.” Then she said something about “the ethos of the West Coast meant that the company has already moved on.” News Flash! The investors who lost up to 43% of their investment have not moved on. They are pissed off. This type of cavalier attitude is going to hurt FB if it continues. In any case, according to Sandberg, FB has not allowed the stock price to affect the confidence of its employees or their creativity.
The response to Sandberg’s presentation was tepid as the stock was unchanged in after-hour trading. For your information the stock closed Tuesday at $22, down from the $38 offering price.
All this conversation ultimately circles back to revenue growth. Companies will not have high price/earnings multiples without explosive growth expectations (FB has an astronomical 77 times multiple).
FB must figure out a way to effectively monetize its relationships with nearly one billion users. In this regard, the advertising industry has to be convinced that an advertising investment will yield revenues equal to a multiple of its investment, like four or five times.
Target advertising is a principal thrust of FB as mentioned in the Times article. It is trying to match up the data it has on users with what these same people do offline. For instance, the trail of data consumers leave behind with loyalty cards and such can benefit FB. In essence, if FB knows a user bought a pair of shoes, it can post shoe ads on the user’s FB page.
Online, FB can and has ventured with online shopping sites, which can pass on information about user purchases of products, which would be followed up with ads for the same types of items purchased.
Privacy issues will inevitably come into play. Do FB users want the company poking around into their buying habits? That remains to be seen.
I was somewhat surprised that no information was provided about the explosion of mobiles (like the new iPhone 5) and the impact this will have on FB. These devices are slowly overwhelming computer usage. In fact, more and more FB users are logging on with smart phones rather than with laptops. The question is can effective advertising be done on the small smart phone screens? This is a critical question for FB.
To conclude, expectations for FB are still very high. The company continues to benefit by a very high price/earnings ratio, which will decline (along with its stock price) if the company cannot convince the investment community that it is still a high flier. FB’s billion users are waiting to be mined, and it just might take some time before this can be done.