Facebook (FB) marked its first anniversary as a public company on May 17, and investors had little reason for merriment. Through May 14 shares were down 29 percent from the initial public offering price of $38, making Facebook the fifth-worst performer of the 124 stocks that debuted during the same period, according to data compiled by Bloomberg. Among companies that raised $200 million or more in an IPO, the social network ranks last.
It could be worse: The stock has climbed more than 50 percent from its September low and has a market value of $65 billion—behind EBay (EBAY) at $73 billion and ahead of Time Warner (TWX) ($57 billion) and DirecTV (DTV) ($36 billion). Yet a year after the company raised $16 billion 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,” says Benjamin Schachter, an analyst at Macquarie Securities (USA). “Is mobile’s growth enough to make up for the declines in desktop? That’s clearly the key issue for the near term.”
Chief Executive Officer Mark Zuckerberg told analysts in January that “there’s no argument. Facebook is a mobile company.” It has introduced several mobile-advertising products, including Sponsored Stories, which allow companies to promote content that a user’s friends have signaled they “like” or interacted with in some way. 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 percent of Facebook’s $1.25 billion in advertising revenue in the first quarter of 2013. Next year, Facebook will have 13.3 percent of the U.S. mobile-advertising market, up from zero in 2011, according to researcher EMarketer. Still, EMarketer predicts that share will decline to 11.5 percent in 2015 amid rising competition, while Google (GOOG) will continue to increase its market share every year, growing to 58 percent in 2015, up from 51 percent in 2011.
As it scrambles 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,” says Richard Greenfield, an analyst with BTIG Research. “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 issue, 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 ever at more than $700 million. Instagram, which now has more than 100 million users, has signaled it’s open to advertising, though it hasn’t said when it might introduce it. And Facebook is in talks to acquire mobile-mapping application provider Waze for as much as $1 billion, two people familiar with the matter said this month. With Waze, Facebook would add advertising revenue from location-based services.
Facebook is expected to report revenue of $6.7 billion this year, an increase of 32 percent from 2012, according to a survey of analysts by Bloomberg. Investors aren’t getting Facebook on the cheap, even with the price declines since the IPO. Shares are trading at 35 times expected earnings for next year, making them the fourth most expensive on the Nasdaq 100 index, which also includes rivals such as Google and Yahoo! (YHOO), according to Bloomberg data. The average one-year price target for Facebook’s stock is $33.41 (12 percent below its IPO debut) among 29 analysts tracked by Bloomberg.
To impress investors, the company needs to find new ways to make money from its vast user base, Schachter says. So far, such revenue has come mostly from gaming companies like Zynga (ZNGA), which lets users play interactive games on Facebook and charges them for items they may purchase inside the applications. “You have over a billion people coming to the site every month,” says Schachter. “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.”
Google remains the gold standard in Internet IPOs of the past 10 years. Its shares jumped 18 percent on the first day of trading in August 2004 and rose more than 200 percent in the first year, as companies clamored for its search-based advertising. LinkedIn (LNKD), a social networking site aimed at professionals, has seen its shares almost quadruple in two years as a public company. Facebook will have to work hard to achieve such returns. “Really, the shift to mobile caught them by surprise,” says Jason Helfstein, 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.”