Facebook’s Stock – What is it measuring?

Since its Initial Public Offering, Facebook has come under intense scrutiny as the bellweather for the social web – can the slew of companies that have been created in the second wave of the web grow up to be real, you know, companies? Can this new breed live up to the valuations Google and Amazon enjoyed, or will they crack like pets.com?

Not content with pillorying the company, the CEO has also come under fire in the snappily titled article: “Is Mark Zuckerberg in over his hoodie as Facebook CEO?

When the crowd is leaning one way, it often pays to look the other way – as The Ad Contrarian often does. His rejoinder is below:

The irony in all this is that Facebook may be a social media venue, but as a business it is nothing more than another medium for selling display ads. To be more succinct, Facebook does not sell social media, it sells display ads. And as we know, the record of online display advertising is below dismal.

Investors think of Facebook as a social media play. It is nothing of the sort. Facebook makes about 85% of its income selling crappy little ads that no one notices. The press has portrayed the Facebook face plant as an indication that the business community has lost confidence in social media. While this may be true, it is not really relevant to Facebook’s business problem.

I have been more than critical of the hype surrounding social media marketing. But let’s be fair. Let’s judge social media marketing on its ability to create results. Not on Facebook’s ability to sell display ads.

New ad units are bringing these two things (social media and ads) closer together and innovations around targeting, app downloads (~$1bn pa) and gambling (~$10bn pa) will continue to increase revenue streams, as will the close knit, direct-client relationships the advertising team is enjoying. Facebook has a long way to come before it can be classed as a real, grown up company in the way Google and Amazon are, but I wouldn’t bet against them and I wouldn’t take the performance of $FB as a true indicator of its success or failure.

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Disclaimer – do not take the financial advice of a social media consultant.

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