Last week's announcement by Facebook (NASDAQ:FB) regarding the launch of Facebook Home and its integration with a HTC (OTC:HTCCY) smartphone are regarded as the follow through of its transformation into a "mobile" company. According to the release, "Home will be available as a free download from the Google Play Store starting April 12."
Will FB be able to extend its "Midas Touch" with users and translate it to a continued ramp-up in advertising revenue? We think there are a number of steps FB needs to accomplish in order to help alleviate the jitters keeping a lid on FB shares since its IPO. Our first article here on SA, "Facebook Audaciously Reveals The Holy Grail And Emerges A Buy" was about FB's "new "intelligent" advertising engine which will ultimately deliver ads to other sites for advertisers." With Facebook Home, FB seems to be delivering its promise on this initiative.
Here are our top five questions Facebook must answer:
1. Are the demographics for FB changing. Many skeptics say the youth is moving on to other platforms such as Twitter, WhatsApp and disappearing photo app Snapchat. If this is the case, will an alliance with HTC really help?
2. Will casual FB users care about FB home or will they start to feel that FB is overexposed? Many fear that overexposure of FB will lead to its waning significance just like the flame out like pioneer social network Myspace experienced after News Corp. (NASDAQ:NWS) acquired it.
3. Will advertisers continue to pay for the high mistaken click-throughs that are attributed to the "fat finger" syndrome?
We think these questions are probably just a starting point in the new challenges for Facebook as the mobile platform converts personal computing from the desktop to smartphone and handheld devices.
An April 9, 2013 Wall Street Journal article by Evelyn Rusli states:
"On Wednesday, Facebook officially plans to roll out a new advertiser tool to help advertisers directly target Facebook users based on their offline spending history. The tool marries what Facebook already knows about people's friends and "likes" with vast troves of information from third-party data marketers such as Datalogix Inc., Acxiom Corp. ACXM +2.98% and Alliance Data Systems Corp.'s ADS+1.23% Epsilon. That includes data on the Web pages that consumers visit, the email lists they have signed up for, and the way they are spending money online and offline."
Here is an illustration from the article:
We have recommended in the past that Facebook should make a bid for BlackBerry (NASDAQ:BBRY) before its price reflects its true long-term potential. But it seems that deal may be too much too soon to ask of a company who is too early in its evolution and not ready for large acquisitions.
As an alternative, FB may need to focus on companies that have strong IP, which will give them some strategic leverage. These may include Vringo (VRNG) or maybe a new company we have found which offers both mobile advertising revenue and IP as well, Single Touch (NASDAQ:SITO). VRNG brings the immediate Google leverage as VRNG has already won a patent infringement suit against GOOG as well as AOL (NYSE:AOL) and others.
SITO, a company we have recently uncovered, may actually make a better fit for FB. It trades in the less liquid OTC market as opposed to the NYSE like VRNG. We feel the shares in SITO are undervalued after examination of its SEC 10-Q and S-1 filings.
Excerpt from the 10-Q:
"Our relationship with AT&T Services, Inc., through which we retain multiple client relationships, represents nearly all of our reported revenue in the quarter ended December 31, 2012. The bulk of that revenue comes from notifications sent on behalf of 4 separate Wal-Mart corporate programs. These programs and related services continue to develop nationwide, and we continue to experience increasing activity in these programs that have caused our AT&T revenues to grow…We have law firms engaged to protect our patented technology rights against unauthorized users and infringers. We have sent letters of notification to several companies making them aware of our patent portfolio and have commenced litigation."
Excerpts from the S-1:
As you can see, SITO has been aggressively issuing stock and convertible debt to build its business.
The public filings show that SITO has an operating business which continues to ramp up its revenues and is heading towards breakeven on a cash basis even with its legal costs related to the IP initiatives. Currently, however, it is highly dependent on two companies, AT&T (NYSE:T) and Wal-Mart (NYSE:WMT). As we read through the filings, we see a company that is sitting on 18 US patents, which are essential in the key areas of accessing information on a mobile device, sending information to and between mobile devices and digital video and audio streaming and advertising.
As we stated in our previous article about Facebook, intelligence on users intertwined with advertising is the "Holy Grail" for monetizing users on the web. This illustrates the key areas of revenue for Facebook. The SITO patents touch all of Home's features including its video streaming as well. Moreover, FB would get an IP strategic lever it does not have today with the SITO IP portfolio. If FB is successful with capturing the "Holy Grail," we think it makes sense to buy some IP insurance to keep hold of it. That insurance may well be the SITO IP portfolio. In the meantime, FB may very well be on to the next leg of its growth trajectory. We still think FB should buy BlackBerry for many reasons stated before in our previous articles. We will continue to gather information on SITO and we think Facebook and several of the other companies mentioned above should as well.
Disclosure: I am long SITO, BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. I am long SITO and would like to increase my position. I am long BBRY. I would consider getting long FB if they demonstrate a more aggressive M&A posture utilizing their stock as a currency.