Stephen Foley: Zuckerberg's long-term view is not enough to calm short-term worries

Stephen Foley
Saturday 28 July 2012 00:27

US Outlook: Mark Zuckerberg kept Wall Street guessing, right up until the start of Facebook's maiden results conference call with analysts. Would the social network's founder and chief executive deign to appear on the call, or would he leave it to his lieutenants, Sheryl Sandberg and David Ebersman, to walk everyone through the numbers?

In retrospect, it is clear he had no choice but to show up. The numbers, Facebook's revenues and profits, were lacklustre at best.

This company was and is a long-term investment gamble; to make that point, it absolutely had to field the man whose eyes are set on the long-term horizon.

But no one is listening to the long-term story right now, because the short-term news is so disconcerting.

Zynga warned on Wednesday that users are deserting Facebook games like FarmVille, from which the social network has been taking a cut of all virtual tractors, sheep and pigpens purchased. That sent Facebook's stock down more than 8 per cent, even as it posted its own lacklustre maiden results as a public company. These showed a continuing slowdown in revenue growth, from a year-over-year 45 per cent in the first quarter to 32 per cent in the three months to 30 June.

The company has been moving cautiously to introduce adverts directly into the news feed of its users, where they can mingle with friends' photos and updates, but it doesn't want to spam users with too many of these "sponsored stories" and privacy campaigners are already suing, so this is not going to be a quick roll-out.

The stock fell another 11 per cent in after-hours trading on Thursday, and yesterday it plumbed further depths – a 20 per cent-plus drop in the last couple of days that means Facebook has lost two-fifths of the $104bn (£66.19bn) valuation it had on day one. Investors that passed by on the other side have had ample opportunity for rubbernecking one of the biggest car crashes in the history of stock-market debuts.

For those who did buy in – and for commentators like me who sounded an optimistic note about Facebook's prospects – it is time to gather one's wits and focus on the long term. To my mind, Facebook has never looked like a company that will get all its revenue from advertising, even though this is the overwhelming source of income at the moment. The value of advertising on the site is still being debated, as General Motors' decision to pull its paid ads earlier this year demonstrates, and there are diminishing options for selling ads on the smaller screens of smartphones.

Advertising will grow, and grow hugely, but there has to be more to justify Facebook's "gamblers' valuation" of 14 times sales.

In my view, this is an opportunity to monetise the platform, by becoming an intermediary for e-commerce, a la Apple.

Mr Zuckerberg's lieutenants talked up the new app store yesterday, which could encourage social gaming through Facebook on a smartphone. Zynga was a pioneer that is flaming out, but there will be other, better Zyngas. Mr Zuckerberg himself riffed on the possibility of Facebook being built into cars in the future.

These are untried and untested ideas; in many cases, they are barely-formed ideas yet. But this is where Facebook will succeed or fail to match its hyped-up valuation.

If Facebook invents a new way to make money from its 955 million users, its shares will be worth multiples of their current price. If not, they will be worth a fraction. Between those two outcomes, a 20 per cent fall is neither here nor there.

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