Facebook's first earnings report as a public company was disappointing, confirming reports that suggested Facebook was approaching the point of saturation domestically. Facebook's net income, even after adjusting for one-time IPO expenses, was less than thrilling:
Facebook (NASDAQ:FB) reported on Thursday evening that it had lost money in the last quarter, a total of $157 million. It was only when you stripped out share-based compensation related to the IPO and payroll tax expenses that net profit got to $295 million.
With 2.14B shares outstanding, the quarter's adjusted EPS was roughly 13.8 cents, hardly enough to justify the share valuation.
Whether or not Facebook is able to overcome these challenges, there's one factor that would make me pause before investing in Facebook. That factor? Mark Zuckerberg, and more specifically, his quote:
We don't build services to make money; we make money to build better services.
To be sure, this sentiment reflects the prevailing social norms of Zuckerberg's generation. According to surveys of the so-called "millennials," a job's salary is no longer the most important consideration.
Though I am technically a millennial, I don't follow the same mindset. I expect return on my investment, whether that investment is in the form of time or money—and if I don't think I am getting enough bang for my buck, I will choose to invest both my time and money elsewhere.
In some cases, it's possible to write off statements like Zuckerberg's as attempts to be "hip" and pander to a generation that seemingly doesn't recognize the value of money. For example, given the obscene profit margins that Apple (NASDAQ:AAPL) makes on sales of the iPhone, it's pretty easy to dismiss Jonathan Ive's recent assertion that Apple's goal "isn't to make money." That statement is a PR play.
But with Zuckerberg, I think it's a different story. Take a quote from one of his close friends in Business Insider's aptly named article "The Problem With Mark Zuckerberg-"
Mark's main motivations were pretty clearly based around materially changing the world and building technology that was used by everyone on the planet. [...] My impression back then was that if he had to choose, he'd rather be the most important/influential person in the world rather than the richest. And I think that's visible in how he directed the company to focus on user growth and product impact rather than revenue or business considerations. Even today, while Facebook makes a ton of money, it could probably make magnitudes more if that were its primary goal.
To be clear, Zuckerberg's goal of connecting the world is laudable. Nonetheless, the bolded text is what makes me wonder if Facebook is—or ever will be—a worthwhile investment. If it operated as a nonprofit, I'd be fully supportive of Mark Zuckerberg and his grand ideas of changing the word. I might even donate to it to keep it running, like I often donate to Wikipedia. But since Facebook is not in fact a nonprofit, and instead a publicly traded corporation, my expectations are completely different.
At the end of the day, public corporations have a fiduciary duty to make money for their shareholders. Milton Friedman examined this point in depth. I obviously believe that corporations should leave the world as a better place, and generally, they do—imagine how many people's lives have been benefited by Intel (NASDAQ:INTC) microprocessors. Intel has certainly "changed the world."
But the second Intel CEO Paul Otellini tells me that his goal isn't to make money—that he's not interested in making money—as an investor, I am out. There's simply no excuse for a public corporation to say that it doesn't want to make money.
And that's why I believe Facebook's problems are fundamental in nature rather than just growing pains. Mobile monetization is a challenge that Facebook will probably overcome, in time—but I am not interested in Facebook overcoming that challenge halfheartedly, in time. I am interested in them putting their efforts into monetizing Facebook to the max, now. Given Facebook's sheer size, I think it's certainly possible for Facebook to make more money than it is now—but it isn't. And I think that's because, as Zuckerberg's friend said, he's not interested in making money.
Mark Zuckerberg may be a brilliant inventor. In his dorm room, he started one of the most widely used websites ever. But while I have confidence in Zuckerberg's ability to continue to innovate, thanks to his actions and words, I have absolutely no confidence that he will reward me as a shareholder by growing Facebook's profits along with its userbase.
I've previously analyzed Facebook's valuation and concluded that the valuation is highly unreasonable. But even if Facebook dropped to $5 a share tomorrow, I wouldn't be buying. Short-term problems can be ironed out, but Zuckerberg's mentality is unfixable.
As long as Mark Zuckerberg is the CEO of Facebook, I won't be an investor.
Disclosure: I am long INTC.