Why Facebook Should Take A Page From Zillow

Includes: FB, LNKD, YELP, Z
by: Matt Schilling

"We monetize on mobile," noted Zillow (NASDAQ:Z) CEO Spencer Rascoff, suggesting that the web based real-estate services company he heads clearly does something that one well-known social network has been unable to capitalize on since its IPO that debuted on May 18th. Many investors and potential investors know that the capitalization of mobile ad revenue is one of Facebook's (NASDAQ:FB) primary goals, and is also of the key catalysts for the company moving forward.

Facebook's CEO Mark Zuckerburg commented on mobile advertising during the company's recent earnings conference call by saying, "We believe that the more our advertising includes interesting content from people you care about, the more marketers will be able to create advertising that adds value to people's experience on Facebook. Advertisement on Facebook today is already delivering a compelling ROI, even though most advertising on Facebook today isn't social".

In other words, Facebook is trying to implement various levels of advertising based on your friends and their friends news feeds and status updates, which in my opinion, isn't the greatest of ideas simply because the implementation really isn't engaging most users and if the strategy isn't clear-cut, most investors are probably going to shy away.

There are a few things I'd like to examine in an effort to make a better case for Zillow when it comes to overall performance, and not just mobile ad monetization. First is the performance factor since Facebook's IPO. Using YCharts, I was able to find that Z is actually up 5.17%, while FB is down just over 44.80% since May 18th 2012. Second is the company's earnings for the June quarter. Zillow is expected to earn $0.04/share on revenue of $27.14 million dollars, and considering the fact it has handily surpassed estimates by an average of 166.67% over the last three quarters and noting the fact it has monetized on mobile advertising, surpassing this quarter's estimate should be no problem.

Facebook, on the other hand, had a mediocre quarter to say the least. EPS estimates were calling for $0.12/share and that's what many analysts had expected. Revenue was expected to come in at $1.15 billion and the company reported a slightly better revenue number of $1.18 billion, with no major enticing information pertaining to either the mastering of mobile ad revenue generation or even the stretch idea of a Facebook phone.

Lastly and most importantly are each company's fundamentals with regard to profit margin and operating margin. Over the last 12 months, Facebook has demonstrated a profit margin of 13.34% and an operating margin of 13.84%, while carrying about $706 million in debt. On the other hand, Zillow has demonstrated a profit margin of just 4.71% and an operating margin of 7.20%, although the company carries zero debt, which can be a very positive catalyst moving forward.

Final Analysis

The driving force behind the success of both companies is going to be ad revenue that is monetized through mobile users. Zillow has a very specific audience is terms of scope, while Facebook has one of the broadest user bases among any of the other social networks, which is going to be very hard to successfully monetize because of how diversified its overall user base is.

I strongly believe that not only is Zillow is full control of its mobile ad destiny, companies such as LinkedIn (NYSE:LNKD) and Yelp (NYSE:YELP) will also be successful because they've become better at understanding the core of their user base and properly targeting users with the correct types of ads in their mobile applications. The fact that each of these companies has a clear-cut direction in terms of their mobile ad strategy easily gives them a leg-up over Facebook.

Potential investors should consider positions in Zillow, LinkedIn, and Yelp prior to considering a position in Facebook if they are looking for growth companies that are able to successfully monetize mobile ads.

Disclosure: I am long Z, LNKD.