On October 4, 2012, Facebook announced that it had finally reached the one billion user mark, and investor concerns have been eased by Facebook CEO Mark Zuckerberg's recent comment that monetization of mobile is a top priority. However, Wall Street opinions differ on just how much the collapse of Zynga Inc (NASDAQ:ZNGA), Facebook's resident social gamemaker, will impact the social giants future revenues, earnings and stock valuation.
Several reports released in recent days, have taken on board recent clarifications of Facebook’s monetization strategy, and others have examined the link between Facebook and Zynga Inc (NASDAQ:ZNGA). If you compare the stock performance of both Facebook and Zynga (see chart below) since their respective IPO dates, you clearly see some kind of cause and effect between these two social networks. You be the judge.
A report from Bank of America Corp. (NASDAQ:BAC) argues that the fall off in revenue from Zynga might affect Facebook in more ways than one. The analysts suggest that the reduction in gaming by Facebook users reflects the fluidity of social network use.
According to the report, Facebook Inc (NASDAQ:FB) might be at risk from greater volatility in results going forward. That could make the company’s stock more volatile from quarter to quarter, than had previously been anticipated, according to the analysts.
Goldman Sachs Group Inc. (NYSE:GS) puts a twelve month price target of $37 on Facebook Inc (NASDAQ:FB) stock. The report sees a worst case scenario, in which Facebook reports earnings that are $10 to $15 million below Wall Street’s expectations, as a result of the reduction in revenue from Zynga Inc (NASDAQ:ZNGA).
Goldman does not mention the structural information about the social market in the way that Bank of America’s analysts do. Greater volatility across all social markets may be a to far of a reach, on the part of BAC.
It is difficult to tell at this stage whether the contraction that has affected Zynga Inc (NASDAQ:ZNGA) is specific to the company, to the gaming sector, or to the entire social networking space. It is too early to pin down any single cause for the company’s misfortune.
There are trends working in Facebook’s favor. Investors have willingly taken on board the company’s clarification of its monetization strategy. New revenue streams are the most important thing to investors in the company. It is now clear that simple visual ads will not bring the revenue growth they crave.
Jeffries lists the company, as a buy with a twelve month price target of $30. The report lauds the newly developed Facebook Exchange, a real-time ad exchange, which allows advertisers for the first time to target audiences on Facebook using their own first-party data and data from third parties. According to the analysis, the new product has a much lower cost per action than other exchanges.
The firm is highly positive about the growth potential of Facebook Exchange, and thinks the product could scale much more quickly than any competing advertising exchanges. The exchange is just one of ten monetization trends Jeffries is now tracking at Facebook.
- Mobile Ad Network - A serve that allows advertisers to pay to target users with ads for app stores or websites based on their Facebook data that appears while they are on other apps and mobile sites.
- Facebook Gifts - on Thursday, September 27, 2012, Facebook unveiled "Gifts." Users can can now choose, mail and pay for real-world, physical gifts — not the lame virtual ones Facebook offered a few years ago — to send to one another, all completely inside of Facebook.
- Sponsored Search - Launched on August 22, 2012, “Sponsored Search” allow marketers to purchase ads that appear within search results in Facebook’s search bar when a user types a certain keyword.
- Promoted Posts - Launched on October 3, 2012, "Promoted Posts" allow users to pay a fee to promote their posts to their friends.
The equation that needs to be solved by investors, is whether or not Facebook Inc (NASDAQ:FB) homegrown revenue channels will scale faster than the projected revenue of Zynga Inc (NASDAQ:ZNGA) was supposed to.
Facebook is finally facing an investing public at least somewhat excited in its growth potential. The company can certainly thrive, if revenue from Zynga collapses, but volatility in the short to medium term may increase, as results come in lower, and potential growth is rechecked.
COMMENTARY: So how will the demise of Zynga affect Facebook? There are two ways: Virtual goods sales and advertising.
Virtual Goods Sales
In Q2 2012, Zynga accounted for 16% of revenues, growing 61% year-over-year, more than twice the rate of the ad business, which was up 28%. The primary sources of virtual goods sales are Zynga games. Facebook keeps 30% of everything Zynga sells to gamers.
Over the last three quarters, virtual goods sales flattened out, mirroring what we've seen with Zynga's revenue and bookings trends:
Facebook Payments Income From Virtual Goods Sales by Zynga (Click Image To Enlarge)
Zynga Advertising
4% of Facebook's Q1 2012revenue came from ads on pages generated by Zynga apps.
Any weakness in Zynga doesn't just hit Facebook's payments business -- it also has a small impact on the advertising side.
Facebook and Zynga Stock Performance Post-IPO
As you can see from the above stock price performance comparison chart for Zynga and Facebook since their respective IPO dates, both have dramatically underperformed. Both companies have failed miserably to live up to their pre-IPO hype, and as a consequence, the stock price of each company has suffered by declining dramatically -- down 44.98% and 73.98% for Facebook and Zynga respectively through October 5, 2012.
What's Facebook Stock Really Worth?
There are definite differences of opinion between Wall Street analysts as to how the stock of Facebook and Zynga should be valued in the short-term or will perform over the long term. The target prices for Facebook shares are all over the ballpark -- from a low of about $10.00 per share to $37.00 per share depending on who is calculating the target price.
In late September 2012, Barron's placed a target price of $15.00 per share. At that price Facebook is basically worth net book value plus one year's estimated earnings for 2012. Barron's felt so good confident in their target price that they announced it on the front cover of their September 24, 2012 issue.
Click Image To Enlarge
Insider Monkey just reported this morning, BTIG analyst Richard Greenfield sent a note Monday morning expressing some serious revenue concerns for Facebook Inc. (NASDAQ:FB), which explained his decision to downgrade the stock from Neutral to Sell and setting a new price target of $16 per share. The stock closed Friday at just shy of $21 per share. Greenfield dropped his revenue projections from $5 billion to $4.9 billion in 2012; and from $5.9 billion to $5.6 billion in 2013.
When Zuck Talk Investors Listen
In a blog post dated September 13, 2012, I reported that Facebook CEO Mark Zuckerberg made his first public interview since the IPO at TechCrunch Disrupt 2012 in San Francico. Zuck said that Facebook had made the decision to move to a mobile-first strategy because users are now accessing Facebook using mobile devices. That's great news since 600 million Facebook users use their smartphones and other mobile devices to access their Facebook account, plus Zuck admited that Facebook had no mobile ad revenues prior to April 2012.
Solely on the news that Facebook was adopting a mobile-first strategy, Facebook's stock price increased nearly 10% in value in a single day. I could never understand why investors are willing to invest in Facebook solely on the choicey words of Zuck. Prudent investors should wait until Facebook has demonstrated that it can generate sustainable and predictable revenues from its mobile monetization efforts.
Mobile Advertising May Not Be A Holy Grail
In a blog post dated October 1, 2012, I commented that in spite of Facebook's massive mobile growth, mobile advertising may not be the Holy Grail some analysts believe. According to eMarketer, Facebook will only generate $72 million in U.S. mobile ad revenues for the year 2012, and only $629 million by the end of 2014. The latter will place Facebook in second place behind Google with $3.6 billion by the end of 2014. That's not exactly worth going out and buying Facebook stock.
Click Image To Enlarge
Mobile Phones Are Poor Platform For Ads
It still remains to be seen whether mobile phones are a viable platform for mobile ads. Here are just a few reasons:
- Users can only see one ad at a time.
- Ads display for 15 seconds or less.
- The small display of mobile phones limits the space available for ads. This is a big reason why many mobile device manufacturers are designing smartphones with larger displays (iPhone 5, Samsung Galaxy SIII, Nokia Lumia 900, and Motorola Razr, to name a few).
- The mobile ad space is a "penny" business. The effective cost per thousand impressions on the desktop web is about $3.50, according to data crunched by Mary Meeker, partner at Silicon Valley venture-capital firm Kleiner Perkins Caufield & Byers. On the mobile internet? It's only 75¢ per thousand impressions.
- Competition and an increase in the number of mobile devices, and the number of advertisers pursuing mobile advertising strategies will drive down ad rates. Unless Facebook can make a solid case that Facebook's users are worth more per thousand, the entire situation does not bode well for Facebook, and this could negatively impact ad rates and mobile ad revenues in the very near future.
Facebook's Failure As An eCommerce Platform
It remains to be seen whether the newly launched Facebook Gifts application could be setting the stage for a larger e-commerce platform as some social media experts believe. Forbes recently suggested that the platform could be used for general shopping, as well as for arranging gift purchases for holidays, birthdays, weddings and other events. This all sounds very hunky-dorey, but in a blog post dated February 17, 2012, I reported just how poorly Facebook had performed as an ecommerce platform for major retailers like Penneys, Nordstroms and Gap. All three retailers closed their Facebook stores after only a few months!! In an earlier blog posts dated July 4, 2011 and July 9, 2011, I commented that retailers are still skeptical and waiting for a very high level of interest before diving into F-commerce aggressively. Furthermore, the facts so far show that F-commerce has a long way to go. Having said this, why does Facebook believe that Facebook Gifts could become a major revenue contributor when the evidence clearly shows otherwise?
Facebook Lacks A Clear Monetization Plan
Clearly, Facebook's mobile monetization strategy is to create as many revenue streams as possible in the hopes that something "sticks." This random, clueless and shotgun approach to mobile monetization is not a strategy. Facebook clearly needs to develop a longterm mobile monetization plan, positioning statement, and cohesive set of strategies in stead of this haphazard and aimless approach to mobile monetization. With so many eommerce alternatives available for gifts and retail merchandise, Facebook must provide a convincing unique value proposition that resonates with consumers and can unhinge the market leaders from the mind of the consumer.
Courtesy of an article dated October 5, 2012 appearing in ValueWalk
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