Diworsification in Action at Facebook
Feb 5th 2013 5:00PM
Updated Feb 5th 2013 5:05PM
Facebook must be wondering what to spend its roughly $9.5 billion in cash and securities on. Unfortunately, I don't think even Facebook will spend it on its newly released Facebook Card, a new type of gift card that can hold multiple balances across different stores. While the company searches for more monetization possibilities it keeps stumbling across solutions in search of problems.
Once again, it looks like this most recent product release will need time to develop before it has an impact on the income statement (if it will have any effect). It's another example of how Facebook might be a good investment in the future but currently isn't an enticing opportunity.
A history of gifts kept in the attic
Back in September, Facebook announced its new Gifts service. This service came after Facebook acquired a start-up named Karma, which allowed Facebook users to send real gifts to friends. That start-up was three months old when acquired, after beginning with $4.5 million in funding. Unfortunately, while Karma may have been making enough to draw an acquisition, Gifts will require a longer timeline to make an sizable impact on the balance sheet.
As CEO Mark Zuckerberg said in the latest earnings call, "I do want to temper near-term expectations a little bit on revenue lines coming from other areas, like Gifts or Graph Search." Revenue from Gifts was lumped together with other revenue, like from promoted posts, which was $5 million in the latest quarter.
The newest attempt
Now, Facebook has released a gift card that can be given to Facebook friends, with values automatically loaded:
So, instead of giving your friends a gift card, which is considered a step above cash among many, you can upload money directly to their Facebook cards to Jamba Juice, Target, Sephora, or Olive Garden, and give them something more ethereal.
The issues with this are that people are already spooked about Facebook's grip on their personal information and aren't particularly satisfied with the website. According to the American Customer Satisfaction Index, Facebook dropped to one of the five lowest-ranked companies measured by the organization on complaints about ads, privacy concerns, and changes to its interface. Additionally, while changing consumer behavior toward social networking was easy while being a first-mover with a new social concept, changing behavior toward the long-standing tradition of gift-giving might not be as easy.
On the other hand, gift cards can be a very lucrative product. For consumers, they allow a more personalized gift to people for whom you may only be Facebook friends, even though you might want a closer relationship. For businesses, 20% of gift cards are never fully redeemed, which could give Facebook and its partners some cushy profit margins, as well as even more data to mine. But, this is not the product that will help Facebook live up to its forward P/E ratio of about 37.
Advertising is the future for Facebook
Even with Google's pile of innovations and its acquisition of Motorola Mobile, 87% of its 2012 revenue was from advertising. While new projects like Google Glass, automated cars, and its own tablets and notebooks could eventually add substantially to Google's income statement, products like Google Maps, Gmail, and Android have only served as a means to deliver more advertising. And Google's forward P/E is less than half of Facebook's, at 14.5, even though they both rely heavily on online advertising.
If Facebook could match the value that Google offers advertisers, it might justify its price. If it could beat its competitors' value to advertisers, it might justify a higher price. But as it stands, Facebook offers neither, with little promise of anything in the future. And while it will likely grow revenue as the entire online advertising market grows, its stock is priced for much more than that.
The Chinese equivalent of Facebook, Renren is estimated to have lost $0.19 per share, but it sells at price-to-sales ratio of 7.9 compared to Facebook's 14. That may be a discount for the lack of democracy that Renren operates under, but that alone makes it seem a more enticing investment than Facebook. And while some say the use of traditional valuation metrics don't apply to social media given that it's a new industry, it seems that until it proves that it's any different than traditional advertising, these stocks are overvalued.
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The article Diworsification in Action at Facebook originally appeared on Fool.com.Fool contributor Dan Newman has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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