Facebook's Critical Next Move

| About: Facebook (FB)
This article is now exclusive for PRO subscribers.

Shares of Facebook (NASDAQ:FB) have been trading around $27 recently, leading many investors to wonder about the long-term viability of the social network company. While its May 17th IPO was valued it at $38 per share, the stock has already lost over 30% of its value. While it is still early in the game for Facebook, this is far from the beginning envisioned by CEO Mark Zuckerberg. This is a volatile time for the company, and investors would be wise to tread lightly.

The latest news on the company that has divided investors is rumors of Facebook looking to acquire Norwegian web browser Opera for over $1 billion. This could be an attempt by Facebook to blunt criticism that it has already peaked. Opera, while far less successful than browsers such as Chrome, created by Google (NASDAQ:GOOG), and Firefox (created by non-profit Mozilla), is seen as a valuable commodity that could potentially be targeted by Google as well.

Google, with far deeper pockets than Facebook, could likely price Facebook out of the market for Opera. If Google views Facebook acquiring Opera as a threat, it may also attempt to acquire it if for no other reason than to stop Facebook from doing so. Opera isn't exactly a well-known company right now, but one securities firm said "a takeover by Facebook will likely send cold water down Google's spine." However, others disagree, and since Facebook just spent over $1 billion on acquiring photo software Instagram, some question whether it is attempting to spread itself too thin, too soon.

What makes Opera a valuable commodity at this point is the fact that it is the most popular internet browser that is still currently independent. The wildly popular Chrome is obviously Google's project, while Internet Explorer is from Microsoft (NASDAQ:MSFT) and Mozilla Firefox is also affiliated with Google. Opera's shares in the Norwegian markets jumped 26% on the news of a potential takeover from Facebook. Norwegian financial analyst Aleksander Nilsen believes acquiring Opera would be a good move for Facebook.

"A deal would make strategic sense for Facebook," Nilsen said. "If they want to get their own browser, they have two alternatives: one is to build their own browser, which will take some time, and two is to buy a company that has a current browser."

Zuckerberg himself has become a bit of a target of critical investors, citing his eccentric behavior and lack of business credentials. In a recent column in the Washington Post, Vivek Wadhwa argued Zuckerberg - like many tech start-up heads - would benefit from the education and maturity that business school provides.

"Zuckerberg would have better understood the rules of corporate finance and capital markets and the importance of ethics and corporate governance," Wadhwa said. "He might have learned the need to build long-term value and share his company's financial upside with the public."

Potentially, this unease about Zuckerberg himself is at the heart of some of the reluctance of investors to go all-in on Facebook. While the fact that he structured the company so that he would always retain full ownership and control points to his genius and at least a little business savvy, this could also be worrisome to those who question the 28-year-old's effectiveness as head of the company going forward.

There's another way Facebook may be looking to expand: phones. At first, it seems strange to people familiar with the concept of Facebook that it would try to get into the saturated cellphone market. But when you consider the main motivations behind a company like Facebook - connecting people via social networks - it does make sense. Google and Microsoft have already been looking to develop respective phones, and Facebook may be on its heels.

The nature of internet use and connectivity is certainly changing. What people have traditionally thought of as phone companies - AT&T (NYSE:T), Verizon (NYSE:VZ), Sprint (NYSE:S) etc. - could soon be replaced by tech start-ups like Facebook and Google as they expand their reaches into formerly unfamiliar markets. This is because communication itself has rapidly evolved due to the internet. A growing number of people communicate solely with their always-online smart phones, foregoing traditional landlines and even traditional talk-centered cell phones.

But once again, some question whether Facebook would be wise to dip its toes into the smartphone market. Geoff Blaber, a mobile device software expert, argues the time is not right for Facebook to get into the market. "I question whether Facebook needs to make its own hardware," Blaber said." It is a hugely intensive undertaking to develop phones. ... It is absolutely relentless."

Getting into the smartphone market would represent a huge financial undertaking for Facebook, especially coming off the acquisition of Instagram, and even more so if the company decides to acquire Opera.

The key problem for Facebook, as with many social network-based companies going forward, is how to monetize the huge amount of users it has. Google found success with its advertisements, but since people use Google when they are actively searching for things, it makes much more sense for them to click the posted advertisements.

Facebook, on the other hand, is struggling with its advertisements. An SEO (search engine optimization) company found that Google's ads are clicked on over 10 times as often as Facebook's. This could be a big problem for Facebook going forward, as they already saw a major advertiser, General Motors (NYSE:GM) pull its advertisements from the site, citing it didn't believe it was getting the value it needed.

It is unclear what Facebook needs to do to bridge the advertising gap with companies like Google, as the fundamental nature of social networking is different from search engines. It may have to be content with the status quo for now, but on the heels of its record-breaking IPO, it is unlikely Zuckerberg is going to pump the breaks.

Accordingly, it seems that it is currently a volatile time to invest too heavily into Facebook, as there is too much uncertainty surrounding the future of the company and whether it will be able to monetize its user base.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.