Since the massive plunge in stock price that followed its initial public offering in May, Facebook's (FB) stock has rebounded nicely. The price per share is currently right under $32, and Facebook stock has seen mostly a gradual increase in price since the first week of June. Facebook's biggest challenge is to capitalize on its online advertising service and generate increasing revenue from it. If so, Facebook has a promising future following in Google's (GOOG) footprints.
For now, Facebook has more questions than answers, though it is coming along. In this article, I will discuss some of the biggest challenges for Facebook moving toward. There's still excitement that Facebook could be a great buy, it's P/E is over 100. It has more than enough cash ($1.64 billion cash flow) to sustain itself. Analysts see Facebook getting back to its IPO price sometime this year, though many are unsure if it will get there or how high it really can go.
Facebook's business model, which focuses on monetizing social media and user data, while not perfectly developed, should maintain its popularity in the future as long as the tech industry keeps growing. Although Facebook is still working on how to use social media and its user information to successfully bring in advertising revenue, it should be only a matter of time until this model is fine-tuned. Benefits already enjoyed by Facebook include its use of network effects and customization, and its market power of social media. Once Facebook learns how to effectively use its online advertising segment, it can also take advantage of these other benefits.
Facebook is running into some setbacks when it comes to its website, user information, and its advertising. For one, Facebook's news feed has become cluttered, so the company is working on how to promote important stories. The problem with a cluttered news feed is two-fold. Not only may users find the cluttered nature of the website unappealing and thus spend less time on it, but the advertisements Facebook puts on its website may be hidden by other posts. If advertisements are not as easily seen, they will be clicked on less by users, lowering the appeal for companies to advertise via Facebook.
Another problem is the idea of users logging into every website they visit via their Facebook name and password. While this is a very convenient idea, some users prefer anonymity when visiting and posting on other sites. Furthermore, competition is rising with Yahoo! (YHOO) and Google also providing the same opportunity on many sites.
Another huge headline for Facebook is Apple's (AAPL) implementation of Facebook in its newest iPhone operating system. While one would believe at first this will lead to an increased use of Facebook, and thus higher advertising revenues, this may not be the case. Using the new software, users can stream all of their Facebook contacts into iPhone contacts, completely bypassing the use of any Facebook application. Users can also stream pictures to Facebook friends without using the application. This means there may be less time spent on Facebook, fewer advertisements will be viewed, and companies will spend less on Facebook advertising.
Taking all of that into account, Facebook is still in good position to increase its revenue from advertisements - which is already its main stream of revenue. While companies and investors have been concerned for some time Facebook advertisements don't effectively generate revenue, multiple reports have now determined otherwise. A recent report has been released that suggests Facebook will enjoy a rise in functionality and effectiveness of its marketing platform.
Yesmail Interactive has reported advertisers are still adjusting Facebook's marketing platform for user needs. As adjustments continue, the advertisements should become more relevant, garner more clicks, and thus increase incentive for companies to advertise via Facebook. The report also noted that the level of engagement between users and the advertisements - which is one of the main ways to assess advertising campaigns - is still increasing.
Facebook also released a few new changes in its advertising options earlier in June. The most interesting change is that advertisers can now purchase mobile-only advertising space. This seems to be a huge improvement for Facebook, as the company has struggled in the past to adjust to the mobile platform and continue to generate revenue through it. This adjustment has already helped increase the success of Facebook's mobile platform, with these mobile advertisements getting over thirteen times the number of click-through rates than the desktop advertisements. This should continue to help Facebook's advertising revenues, leading to higher investor confidence, and higher stock price.
Facebook and the mobile-game producer Zynga (ZNGA) have continued to expand their thus far profitable relationship. Zynga recently released a social networking service that will increase the ability of users to play its games across all different kinds of mobile devices and websites. Zynga With Friends, as the new service is called, will increase the ability of users to play games no matter what device they are using. This should increase the number of players, thus increasing the amount of time spent on Facebook, where a lot of Zynga games are played, and eventually leading to more effective Facebook advertising. Furthermore, Facebook has started running its advertising service on Zynga's website, which should further increase its revenues.
One development that may prove harmful for Facebook's ability to spur investment in the company is the report from Bloomberg Businessweek that suggested spammers are playing a huge role in social media. Spammers control an estimated 40 percent of all members at social media sites, including Facebook. For Facebook, this means there are a much smaller number of users who actually use the social media network - thus decreasing its value. More importantly, if fewer members actually use the website, then fewer members are be subjected to the advertisements that are meant to drive Facebook's revenue. If companies do not expect as many users to see their advertisements, they will not spend as much to advertise on Facebook.
Overall, there is no shortage of troubling news for Facebook's main source of revenue. At best, the headlines being made by Facebook's advertising service have mixed messages, and I am not completely confident in the company's business model. That being said, I am a firm believer that the technology industry and internet sector will be in the mainstream of the economy for years to come, and Facebook may be just a few slight adjustments away from mastering its monetization of social media and online advertising. There may be a time when the idea of buying Facebook at less than $32 would be a dream. It may be the time to get in, as it seems Facebook is more than competent enough to overcome its faults.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.