Two related questions will dog Facebook post-IPO: justifying its valuation, and figuring out what to spend money on next. Agility will be needed to answer them to investors' satisfaction.
The Facebook IPO is history now, happening as I write this. So far the price hasn't wandered far above the $38 target price -- evidence that Facebook priced itself correctly, a commendable feat of financial agility in an uncertain market. And the price has not dropped below the opening -- underwriters stepped in with massive buy orders at $38 to assure that the stock would not submerge even briefly.
The company is trading at more than 100 times its earnings over the previous 12 months. To put it delicately, some observers think this is nuts. James Mackintosh at the Financial Times tweeted: "So $FB at $6 would be a 20x P/E, which seems reasonable for a fast-growing company with no proper business model and terrible governance." (The "terrible governance" comment may refer not so much to Mark Zuckerberg's hoodie as to his statement in the company's initial S-1 SEC filing: "Facebook was not originally created to be a company. It was built to accomplish a social mission -- to make the world more open and connected. We think it's important that everyone who invests in Facebook understands what this mission means to us.")
So Facebook made $3.7 billion in 2011, mostly from advertising. Yet the success of its advertising business is far from assured. Gigaom quotes one large-scale advertiser saying bluntly, "Facebook is a social medium, not an advertising one." It didn't help that GM pulled its $10M advertising spend off of Facebook last week, saying that its ads on the social network don't work. And Facebook's most recent emendation of its S-1 filing didn't help either: the company warned that more and more of its traffic was swinging to mobile, while the needle is barely beginning to move on its mobile ad revenues. Google's search ads are far more effective than ads placed on Facebook, enjoying click-through rates ten times higher by some estimates.
Facebook's revenue picture has a bright spot: Facebook Credits. The money they brought in quadrupled in 2011, to $557 million, according to the Washington Post. Game developer Zynga accounted for 12 percent of that total. Facebook takes 30 percent of in-game or in-app Credits revenue. The Post examines the upsides to this revenue stream for Facebook. The company will need to tread carefully to expand the use of Credits, especially outside of apps and games, for fear of triggering anti-trust scrutiny, according to the Post.
Turning now to the question of what Facebook should do with its new billions, let's look to Mashable for ideas. Their number 1 and 2 suggestions are "mobile" and "ad platform." I can't fault their priority. Facebook needs to improve its mobile posture across the board, and especially needs to find a way to monetize mobile visitors without turning people off with excessive advertising. And improving their ad platform is a no-brainer, though I would go farther than Mashable does and urge Facebook to expand its ads across the entire Web, a la Google's Doubleclick.
I would pull Mashable's number 6 suggestion up to third place: Facebook should invest significantly in business analytics. They must be able to demonstrate value to advertisers. Had they been able to do so, GM would not have walked last week.
Mashable's number 3 suggestion, that Facebook build the capability to go head-to-head with Google in searching the open Web, is just wrong. Building a Google-scale search capability is both massively difficult and killingly expensive (just ask Bing), and it would be a major distraction from Facebook's pursuit of its own real opportunities.
Number 4, acquisitions, speaks directly to the easiest way for Facebook to remain agile as it grows. Already at 3,000 employees, the social network needs the mental and market agility of the many small firms it acquires in order to meet its challenges head-on.
The number 8 and 9 suggestions on Mashable's list deserve more prominence. They are long plays: investing in social media education and in R & D. The former idea is intriguing, calling for Facebook to work with universities to deliver education on a social platform. If it resulted in more student engagement, it would be a clear win for both education and Facebook's future.