As the full details of the Facebook $FB debacle become clear, I wanted to take a look back and see how the media and analysts adjusted their viewpoints in relation to the IPO. It never ceases to amaze me how some commentators twist the facts in order to fit the evidence! Alas, "after the event" wisdom is common in the investment industry and, I often wonder why a firm called Hindsight Asset Management isn’t around to educate us all.
In this context, I want to focus on the way that Google $GOOG has been discussed in relation to Facebook. The firms face many of the same issues, yet Google is often criticized, whilst Facebook is nearly always given the benefit of the doubt.
One thing that has always struck me is when a stock is on an upward move (or in the case of the Facebook IPO, when many have a vested interest in it going up) the commentary is relentlessly positive, yet if a stock has been weak (Google) the same issues suddenly become harbingers of doom. The is particularly perplexing in this case because so many of the issues are shared and, Google is taking a pro-active lead in dealing with them whilst Facebook appears to be lagging.
Google’s Declining Cost Per Click
Ever since the Q4 2011 results, where Google reported declining cost-per-click growth, the commentary on the company has been focused on the reasons for this. Analysts have obsessed over the issue and, the most common reason is usually cited as the transition of web usage from pc to mobile. This is always seen as challenging to Google.
However, it is not as often mentioned with regards Yahoo! $YHOO and, was ignored by many in the run up to the Facebook IPO. This was despite Facebook stating that mobile was a risk and, that the company generated no meaningful revenues from mobile. So let’s see how this issue is affecting Google.
Cost-per-clicks are declining, but paid clicks are increasing dramatically and, it has hardly had an effect on income growth. Google is making adjustments to its business model to account for the shift to mobile. I suspect that mobile advertising is inherently less profitable than pc, but if that is the reality than, the challenge is to adjust to it. Google are doing this and, I think it is safe to conclude that Larry Page knows how to generate revenue from advertising.
Whilst clicking on a link maybe less conducive on a mobile, search via Google, is not. In fact, search works in different ways on mobile because the phone can tell exactly where you are, so results can relevant to your location.
Moreover, there is a trade-off b
etween paid clicks and cost-per-clicks, for example, Google are introducing more site link ads that direct users into specific pages onto a website. Whilst they generate less cost, they are more targeted and are probably increasing the number of clicks and the click-through-rate. The end result is that revenues and profits are growing fast.
This is what Google is doing. What about Facebook?
It seems that the mobile challenge is only being taken seriously post-IPO and, there is a case for the argument that Zuckerberg floated the company before mobile started eroding Facebook’s metrics. The company needs to outline a coherent strategy to monetize mobile. I don’t think it has done any of these things and, it strikes me that looking at friends pics on a Facebook mobile app is not the sort of activity someone wants interrupted by an add, so I can’t see that the Instagram purchase is a strategic masterpiece. It looks like a case of one company, which is struggling to generate average revenue per user (ARPU) growth, bought one that has never generated any.
So why was the media so obsessed with bashing a company like Google that is adjusting to the reality of growing mobile usage, whilst largely ignoring the issue for Facebook pre-IPO?
Mobile Hand Sets
It is a similar story with Motorola Mobility. Google’s acquisition and, move into hardware is seen as being fraught with execution risk, particularly as Page has no background in hardware. However, the speculation that Facebook will try and launch a handset and, buy an operating system for it, is being greeted with optimism. The press are even informing us that Facebook are poaching Apple $AAPL employees. Could Facebook be about to trump Apple in the handset stakes?
Somehow I think not and, here is the coup.
Motorola Mobility is a well regarded handset manufacturer with years of experience and, in any case, the value added with smart phone is usually in the software and ecosystem. Larry Page knows how to make software work. He knows how to generate ad revenue and, Google’s Android operating system (OS) currently has over 53% market share in the smart phone market. Compare this to the far-too-late-to-the-party Microsoft $MSFT partnership with Nokia. Microsoft simply isn’t a significant player in the smart phone OS market, yet analysts frequently cite Windows as a threat to Android.
Google is winning the OS war and, a handset will give them the leverage to start to try and generate serious revenues from Android. In addition, Google has wildly successful operating system and search engine already integrated in phones. Facebook has an app that doesn’t generate meaningful revenues and, a public that is becoming increasingly cautious over privacy issues with Facebook.
Facebook has no experience with hardware, or an OS, nor has it demonstrated an ability to generate revenues with a shift to mobile. The execution risk for Facebook with such a venture would be much higher than for Google. So why are the press and financial community gushing over the speculation with Facebook, but pouring skepticism over Google’s moves?
Social Networking
There is the also the issue of social networking competition for Facebook. I’ve read no end of criticism for Google+ yet it is growing fast. I use it and, have noticed a dramatic pick up over the last few months. What is frequently missed is that it is seamlessly integrated into YouTube and Google search and, users spend a lot of time on those sites. The Hangout feature almost obviates the need to use Microsoft’s Skype and, offers a level of interactivity that Facebook cannot match.
Similarly, fashions change quickly. Facebook had the first mover advantage, but as soon as anyone buys a new smart phone, they are highly likely to download a free phone call app such as Viber or the wildly popular messaging system Whatsapp. I see no reason why mobile users will feel the need to devote themselves to social connectivity solely via a pc derived website like Facebook.
Valuation
And finally, the key question of valuation. Somehow, given all these issues, of which I think Google is better placed, Facebook’s IPO price of 104x current earnings went largely unchallenged pre-IPO, yet at the same time the analyst consensus target for Google is $747 would put it on a current PE of 22.6 whilst the current price is $594. I know which stock I would rather be in.
In conclusion, I think the market is waking up to the fact that these companies face some strategic challenges. Google is dealing with them pro-actively. I'm not sure about Facebook. I think the relative valuation gap between them will close in due course.
In this context, I want to focus on the way that Google $GOOG has been discussed in relation to Facebook. The firms face many of the same issues, yet Google is often criticized, whilst Facebook is nearly always given the benefit of the doubt.
One thing that has always struck me is when a stock is on an upward move (or in the case of the Facebook IPO, when many have a vested interest in it going up) the commentary is relentlessly positive, yet if a stock has been weak (Google) the same issues suddenly become harbingers of doom. The is particularly perplexing in this case because so many of the issues are shared and, Google is taking a pro-active lead in dealing with them whilst Facebook appears to be lagging.
Google’s Declining Cost Per Click
Ever since the Q4 2011 results, where Google reported declining cost-per-click growth, the commentary on the company has been focused on the reasons for this. Analysts have obsessed over the issue and, the most common reason is usually cited as the transition of web usage from pc to mobile. This is always seen as challenging to Google.
However, it is not as often mentioned with regards Yahoo! $YHOO and, was ignored by many in the run up to the Facebook IPO. This was despite Facebook stating that mobile was a risk and, that the company generated no meaningful revenues from mobile. So let’s see how this issue is affecting Google.
Cost-per-clicks are declining, but paid clicks are increasing dramatically and, it has hardly had an effect on income growth. Google is making adjustments to its business model to account for the shift to mobile. I suspect that mobile advertising is inherently less profitable than pc, but if that is the reality than, the challenge is to adjust to it. Google are doing this and, I think it is safe to conclude that Larry Page knows how to generate revenue from advertising.
Whilst clicking on a link maybe less conducive on a mobile, search via Google, is not. In fact, search works in different ways on mobile because the phone can tell exactly where you are, so results can relevant to your location.
Moreover, there is a trade-off b
etween paid clicks and cost-per-clicks, for example, Google are introducing more site link ads that direct users into specific pages onto a website. Whilst they generate less cost, they are more targeted and are probably increasing the number of clicks and the click-through-rate. The end result is that revenues and profits are growing fast.
This is what Google is doing. What about Facebook?
It seems that the mobile challenge is only being taken seriously post-IPO and, there is a case for the argument that Zuckerberg floated the company before mobile started eroding Facebook’s metrics. The company needs to outline a coherent strategy to monetize mobile. I don’t think it has done any of these things and, it strikes me that looking at friends pics on a Facebook mobile app is not the sort of activity someone wants interrupted by an add, so I can’t see that the Instagram purchase is a strategic masterpiece. It looks like a case of one company, which is struggling to generate average revenue per user (ARPU) growth, bought one that has never generated any.
So why was the media so obsessed with bashing a company like Google that is adjusting to the reality of growing mobile usage, whilst largely ignoring the issue for Facebook pre-IPO?
Mobile Hand Sets
It is a similar story with Motorola Mobility. Google’s acquisition and, move into hardware is seen as being fraught with execution risk, particularly as Page has no background in hardware. However, the speculation that Facebook will try and launch a handset and, buy an operating system for it, is being greeted with optimism. The press are even informing us that Facebook are poaching Apple $AAPL employees. Could Facebook be about to trump Apple in the handset stakes?
Somehow I think not and, here is the coup.
Motorola Mobility is a well regarded handset manufacturer with years of experience and, in any case, the value added with smart phone is usually in the software and ecosystem. Larry Page knows how to make software work. He knows how to generate ad revenue and, Google’s Android operating system (OS) currently has over 53% market share in the smart phone market. Compare this to the far-too-late-to-the-party Microsoft $MSFT partnership with Nokia. Microsoft simply isn’t a significant player in the smart phone OS market, yet analysts frequently cite Windows as a threat to Android.
Google is winning the OS war and, a handset will give them the leverage to start to try and generate serious revenues from Android. In addition, Google has wildly successful operating system and search engine already integrated in phones. Facebook has an app that doesn’t generate meaningful revenues and, a public that is becoming increasingly cautious over privacy issues with Facebook.
Facebook has no experience with hardware, or an OS, nor has it demonstrated an ability to generate revenues with a shift to mobile. The execution risk for Facebook with such a venture would be much higher than for Google. So why are the press and financial community gushing over the speculation with Facebook, but pouring skepticism over Google’s moves?
Social Networking
There is the also the issue of social networking competition for Facebook. I’ve read no end of criticism for Google+ yet it is growing fast. I use it and, have noticed a dramatic pick up over the last few months. What is frequently missed is that it is seamlessly integrated into YouTube and Google search and, users spend a lot of time on those sites. The Hangout feature almost obviates the need to use Microsoft’s Skype and, offers a level of interactivity that Facebook cannot match.
Similarly, fashions change quickly. Facebook had the first mover advantage, but as soon as anyone buys a new smart phone, they are highly likely to download a free phone call app such as Viber or the wildly popular messaging system Whatsapp. I see no reason why mobile users will feel the need to devote themselves to social connectivity solely via a pc derived website like Facebook.
Valuation
And finally, the key question of valuation. Somehow, given all these issues, of which I think Google is better placed, Facebook’s IPO price of 104x current earnings went largely unchallenged pre-IPO, yet at the same time the analyst consensus target for Google is $747 would put it on a current PE of 22.6 whilst the current price is $594. I know which stock I would rather be in.
In conclusion, I think the market is waking up to the fact that these companies face some strategic challenges. Google is dealing with them pro-actively. I'm not sure about Facebook. I think the relative valuation gap between them will close in due course.
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