The wait is over, Facebook Inc. (NASDAQ: FB) is now a publicly traded company and the activity surrounding the social media giant has been off the charts on Friday as volume has surpassed the 350 million mark by mid-afternoon while the company’s share price has bounced between an opening of 38.00 and a high of 45.00, currently moving around the 41.00 level.
While the buzz over Facebook’s debut on the NASDAQ has been well documented the question remains, is the Mark Zuckerberg led company a wise investment? The company raised $16 billion in their arranged IPO on Thursday, placing Facebook’s value at $104 billion. Over the past two years FB has shown they can generate revenue, collecting $1.06 billion during the first three months of 2012 compared to $1 billion in 2011, but is that revenue climb sustainable.
Facebook generates most of their revenue off of advertising, no surprise there, but there have been a number of companies questioning the effectiveness of their ad campaigns within the social networking community. Most recently GM opted to end their paid advertising efforts on FB when they concluded they weren’t getting the kind of return they were seeking.
Whether or not this will start a trend in companies reducing or eliminating their Facebook advertising is yet to be known but it should certainly be of concern to investors. Facebook’s popularity among its 900 million monthly users is unquestionably an attractive draw for advertisers but if these companies can’t convert members into customers then it loses its appeal.
With their current advertising platform Facebook displays a company’s ad in an almost apologetic manner to its members, cast to the side of the page with little fanfare. The reason is obvious; members don’t want to be inundated with advertising on what they consider their page. Facebook will have to find a balance that allows advertisers and members to coexist and that may be a difficult proposition.
As it stands advertising on Facebook cannot be considered a threat to Google’s AdSense, clearly the most dominant form of advertising that currently exists on the Internet. Of course Facebook has been active in acquiring other companies which could lend a hand in generating revenue, most notably Instagram, the maker of mobile apps for photos, for $1 billion.
Not to be dismissed in the matter is, for a lack of a better word, fear expressed by current members of Facebook. There have been a number of negative opinions expressed concerning Facebook’s jump to Wall Street and predictions of a shifting platform have been plenty. While Facebook has long pledged to keep their site free there are those who still believe free will come at a cost, especially now that the company is married to its shareholders.
Because of the uncertainty surrounding the direction of the company and knowing that there could be a number of obstacles that they have to overcome the current share price appears to be a considerable risk for investing.
The one thing that Facebook does have on their side is the fact they have very little competition in the social networking environment. While Google made an effort and still claims to be adding members to their social networking platform Google+ the reality is it’s been a disappointment. Facebook has done an excellent job of creating a platform that many users simply feel they can’t do without so any kind of mass exodus is unlikely.
Unfortunately for Facebook it’s not a mass exodus by members that worries them, it’s the advertisers and this has to be addressed and quickly if they are to sustain the kind of revenue growth they have generated over the past three years.