The recent slowdown in advertising revenue growth at Facebook may only be the result of advertisers experimenting with new products, says a top advertising executive.
The Facebook IPO Primer by Nancy Miller
In a conference call with investors last week, Gemma Craven, head of Social@Oglivy, said that she would expect revenues to take a hit as Facebook introduces new products. “The slowdown in growth is not concerning,” she said on the call moderated by Lou Kerner, founder of the Social Internet Fund and host of the Facebook Ecosystem Speaker Series. “Brands can experiment” with the new offerings before making serious advertising investments, Craven said.
Last week, Facebook reported revenue had dropped 6.4 percent to $1.06 billion from the previous quarter, its first consecutive revenue decline. Facebook blamed the drop on seasonal factors.
Craven notes that Facebook has been rolling out new products very swiftly. Social ads such as sponsored stories improve click-through rates on ads by 50 percent, she reports. She says that Facebook advertising are boosting their budgets to 23 percent from 5 percent for sponsored story ads. And the rates for those ads are surging.
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The outlook for Facebook’s advertising prowess is central to Facebook, which plans on pricing its initial public offeringof 377 million shares on May 17 — even if you believe that the company has many more revenue opportunities down the road. The company also reported last week that its mobile users are growingmore swiftly than advertising, which appeared to deflate the excitement to invest among institutional investors.
The Facebook IPOis perhaps the most hotly debated offering since the Google IPO in 2004 (coincidentally, the same year Mark Zuckerberg began coding “thefacebook”). Is it even remotely possible that a company with one billion users could manage a stock sale that is anything less than a blowout success? Is it even remotely possible that investors of all stripes — sophisticates, newbies, tech whizzes — would be willing to buy shares that assume the company will be worth $100 billion? That’s more than Kraft or Boeing, a price that doesn’t really allow for zigs or zags in Facebook’s story.
That, in a nutshell, is the conundrum of Facebook. It is a bitter struggle between what is and what could be; between the here and now, and oh-what-could-be. In the bear corner, we have the Myspacers, the people who see fickle users willing to move to the next new thing in a flash. In the bull corner, we have the Googlers, the people who see Facebook grabbing a bigger piece of the $600 billion advertising pie and inventing new businesses at intergalactic speed.
Facebook is not just a platform for people to connect, but as a business it is a battlefield for visionaries and futurists to array their arguments — and that’s the point of my recent ebook on the Facebook IPO.
The numbers — the income statement and balance sheet, the stats on mobile and desktop users, and daily and monthly users — they are the nouns and verbs from which the pros construct their manifestoes and the rallying points for investors. Over the course of the past week, the experts have been coming out swinging, explaining why you could double your money in three years, if the deal is priced at $40 (Robert Peck at CoRise) or why you should beware (Sam Hamadeh at Privco). What is so rich about the discussions is that new information keeps pouring out of Facebook, even as it inches closer to its IPO pricing day.
The story won’t stop evolving, just like the culture that Mark Zuckerberg prizes as in a state of constant change. “Move fast and break things,” he considers to be a basic tenet of the social media company.
In the Facebook EcoSystem conference call with investors, Social Internet’s Lou Kerner said “Everything old is new again.” The air pressure around Google dropped sharply during its roadshow, Kerner recalled. But Kerner said that the media is missing something important in this deal: the keen retail interest. Word out on the Street is now that Facebook wants the shares to go to a whopping 25 percent of the public. My sources tell me that after sweating about shares allocation, Morgan Stanley has told its brokers that they need not worry. If they want shares, they will get them (though it’s not clear that they’ll get anything in very big size).
Usually this would be a sign that institutions are balking at the deal. One hedge fund manager told me that some institutions are nervous about the mobile story on Facebook. “We don’t see investors being rewarded for the risks,” said Privco’s Hamadeh on the recent conference call.
Clearly, investors are biting; and by one report, the underwriters already have 20x the orders they need to wrap up the deal — which they are planning on doing Tuesday. Something is going right: Despite the barrage of negativity, the underwriters raised the price rangeon the stock offering on Monday to $34 to $38 a share, up from $28 to $35 a share.
Nancy Miller is a freelance financial journalist and author of “The Facebook IPO Primer.” Miller is also a contributor to Time.com and writes for a variety of other publications, including Barron's and The Fiscal Times.
Follow Nancy Miller on Twitter: @nancefinance