Short-sellers can thank Barrons
Barrons
published a scathing report earlier in the week causing the stock to
drop 9%. We have talked about FB before thinking that the low $20’s was a good
long term entry point given the optionality in the business. At a recent techcrunch
conference Mark Zuckerberg caused the stock to spike (finally up)
talking about the potential of search. I have to admit I was surprised by the
number of searches disclosed 1 billion per day but the majority of these are searches
for people not transactions. FB needs to find a way to get closer to customer transactions.
We have seen this trend before with Google (GOOG), the closer advertisers can
target customers making a transaction the more valuable it becomes one reason GOOG
has done so well.
Speaking of GOOG transactions, a recent search brought up
this autosuggestion. I can think of why GOOG might suggest a cold one (beer for
non-Australians) but a cheap rhinoceros?
Something to Like? Fight a verb (GOOG) with a verb (Want button)
There is still potential for FB I believe in social
e-commerce. For example FB adding buttons other than like, as at the end of the
day what does like mean? As a verb it means something you enjoy, to advertising
companies the value is not clear. Advertisers need to know if the customer is already
an owner and fan of the company’s products or a future buyer looking to
transact, two different propositions to advertisers. With a like it cannot be clearly
answered but a want button is clear in intent and is more similar to a specific
GOOG product search, a customer interested in entering into a transaction. We
are seeing signs of social e-commerce today with CNBC reporting trial runs of FB gifts. It is basically designed to take advantage of information FB has on users birthdays and can suggest gifts based on profiles. I'm guessing that birthday reminders and social peer pressure will lead to increased presents for users!
Need to show mobile
progress
This is some of the optionality that FB brings, however investors will
not pay up for the optionality until a clearer path to mobile monetisation is worked out. Mobile monetisation needs a solution
that is seen as enhancing a service (like GOOG showing ads based on search) and
not as a nuisance. Having integrated ads in FB news feed is promising but is
beginning to look like a a nuisance with users given the small mobile screen
space and annoying political ads.
Source eMarketer
Triple Play
GOOG has taken the lead from FB a number one in online
display according to eMarketer. That now leaves GOOG as the number one advertiser
in search, display and mobile. This combination is a very compelling sales
proposition for advertisers. GOOG has successfully balanced the fine-line between
making money and making great products. Larry Page in last years CEO letter
describes how important this balance is, as to innovate GOOG must have healthy
revenues. This makes sense (hopefully so!) but not always to great inventors.
Larry retells reading about Nikola Tesla a famous investor whose impact was
limited because he failed to make money from his inventions. This is a lesson
GOOG has taken to heart and one FB has to act upon.
Conclusion
The long term potential for FB has not changed so investors
need to watch it, especially post the well-publicised employee lock up expiry in early
November. The fact that FB has not figured out mobile monetisation is
concerning given mobile monthly active users (MAU) numbered 545m last quarter
or 57% of total MAU. FB only began showing ads on mobile at the start of the
year. GOOG recognised the mobile threat earlier and have established themselves
as the leading mobile operating system of choice (Android) with dominant mobile
revenue market share. The value proposition of a potential transaction is much
more compelling than just brand exposure.
Just like the advertisers we will keep
our dollars with GOOG while keeping an eye out for FB progression into social
e-commerce and transaction based advertising.
Disclosure: Decisive is long GOOG
The material in this article is for
informational purposes only and in no way constitutes a solicitation of
business or investment advice. The material has been prepared without regard to
any client's or other person's investment objectives. Before making an
investment decision you should consider the assistance of a financial adviser
and whether any investment or service is appropriate in light of your
particular investment needs.
