It seems like these days technology can do nearly anything one asks of it, except cure the common cold. Unfortunately for Facebook Inc. (FB), finding a means by which to monetize its one billion users has remained equally elusive. On the other end of this conundrum is Pandora Media Inc. (P) that has found a way to unlock this elusive yet critical business need. While there are a select few established players that are able to drive serious revenues from online activities, the latest collection of web-based upstarts and social media mavens continues to struggle. Perhaps by exploring those factors that differentiate the successful behemoths and the struggling interlopers, investors can gain enough insight to produce an edge to generate the alpha we all seek.
Facebook's Turbulent Start
Since the company debuted as a public issue, Facebook shares have been falling to progressively lower lows. Many have begun to question whether the stock has fallen low enough to justify buying some shares, while others bring up the trading adage about trying to catch a falling knife - don't, in case you are not familiar. The other question that continues to surround the stock, and many that are similarly situated, is how the company can find some revenue in its billion-user customer base. To address the first question, while the stock has been impressively hammered, it is not low enough to simply roll the dice. There is definitely a sense in the market that investors would like to see Facebook bounce, but this feeling is abstract at best. The company has been plagued with insider selling, corporate growing pains and the lack of a clear and differentiable product. While there can be little doubt that Mark Zuckerberg has the creativity and vision to find the right formula, it has yet to materialize.
Other Upstarts and Social Media Options
There are few segments of the market that receive as much attention as the one that includes online niche players and social media companies. Below is a brief discussion of two companies in the space, their relative strengths and weaknesses and what, if any, insight they may provide to the Facebook situation:
Groupon Inc. (GRPN) - This company has a clear strategy on how it hopes to drive revenues; it has simply been unsuccessful thus far. Since the stock debuted last November, it has fallen from above $25 per share to just over $4. The company now plans to release its second generation of user interface in hopes of bolstering business and making a dent in the mobile market place. As far as offering a lesson to Facebook shareholders, anyone who has been hurt by Groupon will attest that an easy-to-understand product is only a piece of the puzzle.
LinkedIn Corp. (LNKD) - Rapidly becoming the leader in business driven social networking, LinkedIn has been successful at maintaining its relevance to users while eking out a profit. As a business driven tool, it is clearer how this company will monetize its presence, but with a P/E ratio approaching 800, discussing valuation is somewhat absurd. The LinkedIn case is important to Facebook because the company has found a way to make something unique about it - its relationship to business - appealing to advertisers.
The Big Boys
The one company that has outpaced all others in broad basted internet dominance is Google Inc. (GOOG). While eBay Inc. (EBAY) was the first e-business to hit profitability, the search giant is perhaps the most applicable to Facebook. Still both companies lend something to the conversation:
eBay - The company redefined the shopping experience, much as Facebook has redefined how people communicate and interact. The true genius of eBay was that it put itself between customers and found a way to derive a profit. When the company added PayPal, it took a foray into exploring how things are paid for. If Facebook is to succeed, it must find a way to monetize the gateway it controls.
Google - Largely by being the best at what people spend the most time online doing -searching for things - Google has been able to assert its dominance in a cash generating position. This applies to Facebook because ad generation is likely to be at the core of Facebook's success if it is able to find its stride. More on Google below.
Pandora is an interesting case that bears mention because its users are as loyal as those on Facebook and because the company has begun to find its stride. While last Wednesday's financial results were mixed - the company reported a widening earnings loss, broke even on a non-GAAP basis and posted a 51% surge in total revenue - the way forward looks clear. With coming upgrades to its apps and increased optionality for users, Pandora is finding ways to push deeper into the mobile market to drive revenue. This is likely to be one of the largest growth areas in the next decade, so the move is very positive for the stock.
The parallel for Facebook is that the company will likely need to capture mobile advertising dollars if it is to turn the corner. Where Pandora has a distinct advantage is in its format. Listeners are used to being interrupted by ads; those browsing have grown accustomed to simply tuning out the ads.
How Facebook Can Take a Page From Google
One of the ways in which Google is enhancing its offering to advertisers is by leveraging the power of its GPS-enabled apps for the mobile market. When enabled, Google knows where any given phone is located and is able to customize ad delivery based on location and proximity to a given retailer. This allows a retailer to target its ads with increasing accuracy and effectiveness.
The Facebook spin on this approach is premised on the idea that Facebook has more data about its users than even Google. Based on likes and dislikes, age, demographics and other information, Facebook has the power to allow advertisers to drill down even further into the potential customers its wishes to target. Consumers are likely to accept this minor invasion of privacy if it spells meaningful savings at shops that the user frequents. Developing such an offering may be complex, but is one of the ways Facebook may be able to turn the corner.
How to Trade It
At current levels, the stock still appears best classified as a speculative play, but the company is not going anywhere. At entry points of $15 down to $12, investors may still have to be patient, but the gamble should eventually reap rewards. The stock and the company have a long way to go, but do not count them out just yet.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.