Stock Capsule: Good for $LNKD and $ZNGA. Bad for $GRPN, $YELP, $RLOC.
First of all you can’t help but notice how Facebook has taken a very consumer marketing approach to their roadshow. It’s in a kind of “mockumentary” format. As an aside their use of Flash puts a little positive spin on one of Adobe’s “dead” technologies.
They’ve chosen a pretty tight focus on the personal side of Facebook, particularly photos. Their emphasis on photos was greater than I expected. But they “pan out” to a mega mission of “making the world open and connected.”
From a product perspective FB focused on two: the timeline which is about “who you are” and the newsfeed which is “your personal window on the world” and designed to show you what you most want to see.
Turning to FB as a platform it makes you wonder how companies like As a platform it makes you think that Groupon $GRPN and Yelp $YELP are toast unless they can figure out some judo moves to keep FB from rolling over them. They appear to be features not companies next to the FB platform.
Examples like the NYT “Recommend” button show that businesses are able incorporate FB into their own sites with the platform approach and not worry about having to bring their services and content to FB itself. This is where FB has a huge advantage. Twitter and LinkedIn $LNKD have made some progress here but they need to do more.
Zynga $ZNGA gets a nod. They understood that the social element of the game was more important than the game. This continues to be a part of gaming that most gaming companies have a hard time understanding. It’s antithetical to how they think. For them it’s about the game but for people it’s often about playing together. People spend hours together playing horseshoes or the smaller equivalent “washers.” It’s not about the game it’s about sharing the experience. Zynga really got this early and continues to exploit it.
The social sharing features are aimed at creating a much more fluid set of status updates about what your friends are doing: “Herbert is listening to The Ramones on Spotify,” “Janet is reading an article “Why Go to College?” at the New York Times,” “Fred is enjoying fried snakes over at the Hungry Turtle restaurant.” How well this scales as you reach your 150 “good friend” limit is hard to say.
Brands like Ben & Jerry’s are “friendly” and are a good example of a company with high FB affinity. They have 3.4M fans on FB and point out that their fans have hundreds of millions of friends there. All more TAM for yummy new ice cream flavors. This may become a metric for consumer growth companies. Investors will track what they can!
Nielsen $NLSN gets a nod. There’s the usual backdrop of how out of $600B global marketing spend only a small percentage is spent online. FB value story is fairly obvious – reach, relevance (real identity makes it more accurate), engagement (it’s an ongoing relationship with status updates) , social context (recommendations are key to sales versus advertising.)
There’s a fly in the ointment of this formula. Getting personal updates about your friends is much different than messages and updates from companies. The advent of “sponsored stories” and some of the nasty tricks firms like Yahoo use to basically scam your endorsement to friends are a poisson in the potion.
FB does look like a good fit for local advertisers. This is where success may be greater than investors realize. It may put the final nail in the coffin for Groupon and ReachLocal. It’s not good news for LivingSocial (owned by Amazon $AMZN) either. FB local is a natural complement to Google $GOOG for local merchants and together they will get the job done.
The key performance indicators (KPIs) for FB will be user growth, engagement levels and payments growth. Penetration is getting very high in some countries (US/UK @ 60%, Turkey and Chile at 85%) but there are lots of areas still below 50%.
Mobile is substantial with about 500M users accessing FB from mobile devices and monetization there is more challenging. They have started to put small advertisements into the news feed but it won’t contribute meaningful advertising revenue for some time.
Payments is interesting. $550M revenues for FB in 2011. Right now it’s all for the purchase of virtual goods on FB. “May seek to extend payments outside of games but may take a lower percentage on that business.” This is an area that could go nowhere or be an important growth area – just too soon to tell.
Employee growth has been substantial but not crazy – the count stood at 3200 end of 2011. CapEx is an important cost element of the story with just over $1B spent in 2011. Run rate for 2012 looks like $2B. Massive scale at 10% of global population every month. Computer power is a competitive advantage.
Operating margins have been very high. 47% in 2011 and 36% in 1Q2012. Won’t hesitate to make investments even if margins go down. Mobile is a good example. Such high operating margins are a blessing and a curse. Investors love them going up and hate them going down, could make it hard for momentum investors.
In summary FB wants investors who “believe in the mission and are excited about the long-term potential.”
A few additional comments/questions:
App integration with FB is a true but depressing factor to the long-term story. Will every product experience want to be social?
We’ve already crossed the line a few times with FB regarding privacy and user ownership of data. Do you really want your whole social graph online and property of FB?
On balance this is good news for LinkedIn. Business is very different from personal and LinkedIn is in a great position to own this other very desirable part of the market.
Although we don’t expect investors to care much about valuation on this deal we’ll be completing our IV analysis and typical writeup next week.
Finally it would seem that FB will want to get deeper into music and video content given their current focus on photographs. Post the IPO they may begin to buy their way deeper into this space. Their resources to do so will be practically unlimited.
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