Wednesday, May 16, 2012

Does Facebook Offer A Strong Revenue Model?

With Facebook's IPO happening while simultaneously General Motors is pulling out their advertising dollars raises an interesting question.  Does Facebook have a long term growing revenue model?  GM says their ads didn't work on FB and so they are being pulled off.  "GM will continue to promote its products on Facebook, but without paying the social-media company, the GM official and other people familiar with the matter said. Many companies maintain free Facebook pages."  But will other companies follow suit or are they seeing a ROI that GM could not?

At the same time, FB announced that Q1 revenues declined this year from the previous quarter, although they are higher than Q1 of last year.  Personally, I can't say I recall any ads on FB although I sometimes chuckle when I see one of my friends saying they "Like" a product or company.  Should ads get more intrusive on FB, it may cause users to seek alternative social media sites.  One must wonder if an ad revenue model is enough to keep FB a long term "buy".

With its IPO, FB should be flush with cash and might consider acquisitions that expand its reach.  As the editorial in the WSJ suggests, they could consider entry into other businesses.  "The bold approach would be to buy a bunch of media properties as an outlet for targeted ads that the Facebook engine makes possible."  Another push might be into more e-commerce businesses and to be the central place to both buy and share your feedback about certain purchases.

Should consumers prove fickle and grow tired of FB, the concern may be that this is simply another example of the internet bubble.  Premature excitement but not enough tangible results.  As an investor, I am staying on the sidelines, as a FB user, I have watched my usage shift as I've grown weary of some of the changes to the site.