Facebook: Headed For A Slow Burnout

Sep.18.12 | About: Facebook (FB)

Prior to the Facebook (NASDAQ:FB) IPO, there were several questions on the horizon which should have been red flags for potential investors. There was no doubt that Facebook's IPO would undoubtedly be successful - a worldwide social networking phenomenon could hardly help but lure in tech investors. But what then?

The question of where it would go for the revenue necessary to keep the Wall Street Monkey off its back was looming. Coupled with the clear evidence that it simply did not have strong enough leadership to prevent a quick and ugly turn, its life expectancy and stock success seemed anything but secure.

What Happened

Internet IPOs have been victims of mixed success. Groupon (NASDAQ:GRPN) has lost almost 48% of its value since opening last November, while stock at professional network LinkedIn (NYSE:LNKD) has gained nearly 150% since it started trading in May.

Facebook stock was the definition of 'Great Expectations'. The potential equaled that of Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT) when they first debuted. So it was with puzzlement (and quite a bit of frustration) that the stock quickly crashed and has been limping along ever since. The stock price, currently $22/share, is down over 41 percent from the IPO offering price.

The obvious question was, "Why?" And an equally obvious answer was/is, "Leadership."

As a social communication tool and as a company focused on bringing people together through networking, investors and analysts alike expected CEO Mark Zuckerberg to be much more communicative with shareholders. On the contrary, his silence, awkward interviews, and lackluster assurances to the investment community have been described as 'a depressant on the stock price.' Moreover, there seems to be an utter lack of focus on creating revenue-generating products and for not publicly commenting on Facebook's stock performance.

It is also no help to the company that with a network of almost one billion users, none directly impact revenues because the platform, usage, sharing, etc, is completely free. Advertisers have been and are the principal source of revenue for the company, since companies' ads would be delivered to a billion users.

While this would be tempting to the untrained exec who thinks an ad or two on Facebook would automatically increase business, one needs to look at customer transfer more closely before handing over ad money. How many viewers of the ad are actually converted to customers?

What Is Happening

With Facebook's stock performance shaky at best, and with prospects for sustainability looking bleak, it was indeed surprising when, this past week, Zuckerberg stepped into (arguably for the first time) the role of 'Leader' and delivered a strong and articulate response to critics, as well as a look at direction for his company.

At the TechCrunch Disrupt conference, Zuckerberg finally publicly addressed stock performance, saying that shareholders and users alike should look to where the company is going, and not dwell on current situations. (The current situation being the stock was at the time he spoke worth about half what it was at the IPO). Moreover, he was forthcoming about plans the company has for mobile devices. His focus on search and mobile improvements seemed like enough to spark movement on Wall Street, as the speech resulted in a small share price rally of about 12%, moving it to about $22 a share.

What It Means

There are some who believe last week's speech was the onset of 'Zuckerberg 2.0.' Moving from techie to CEO is a hard leap for anyone. Moving from CEO to competent and effective CEO is just as difficult. Some believe this presentation is evidence of this growth.

A company's success is directly proportional to the capabilities of its leader. To compare Facebook to companies such as Apple or Microsoft based on business model and structure alone would be incongruent. Apple and Microsoft are not comparable as they manufacture products sold to a huge customer base. Even a comparison with Google has its limitations. Though its major source of revenue comes from advertising, similar to FB, customer use is differentiated, as one is for informational purposes and the other for social connection.

A better comparison would be between the leaders of these companies. Zuckerberg is far from the charisma of Steve Jobs, the business horse-sense of Bill Gates, or even the steady-handed direction of Larry Page. One good presentation does not spell smooth sailing into the future.

What Could Happen

Facebook needs to start making money. As advertising is somewhat limiting, its next method for doing so might be for the most loved and recognizable social networking site to resort to nickel and diming everyone, which will result in frustration, anger, and hitting the 'deactivate' button.

A test was recently conducted in New Zealand to see if charging for small things such as space for pictures, status updates, and more control over who sees what would result in negative perception. The short answer is: absolutely. Charging for the 'expecteds' as if they were 'extras' is the slippery slope that could lead to millions walking away.

Here's another scenario: Facebook continues to deteriorate. It has a big reserve in the bank and the slow fade could take quite a while. But eventually, it could reach the point where it looks at selling. That is the time for another stronger, and more business savvy company to come in and buy the asset. The right leadership could make the social networking tool a money-maker. Unfortunately, it seems those leaders are anywhere but on the Facebook Board of Directors.


According to IBTIMES, at the current level, Facebook's price-earnings ratio is a staggering 122, compared to 16 for Apple and 15 for IBM (NYSE:IBM). Even director Peter Thiel showed his faith in the company last month by liquidating most of his remaining shares. While some rate this stock a 'buy' since it essentially sits at half price, I don't see much chance of it reaching the height from whence it began.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.