Facebook Mark Zuckerberg

Shares of Facebook Inc (NASDAQ:FB) have surged 30% from the bottom on September 4, more than the 2% increase in the S&P500 over the same period, with investors reacting positively to comments from CEO Zuckerberg at Tech Crunch. Then yesterday, Facebook shares tanked over 9%, and at one point during the day, double digits. Stifel Nicholas is out with a note detailing Mark Zuckerberg’s remarks during his interview with Tech Crunch, earlier this month. Stifel thinks that Zuckerberg may have over-promised, and the firm maintains its neutral rating, noting that “it’s complicated.”

Facebook shares model and over-promises on mobile from Mark Zuckerberg

Parsing Comments: CEO Zuckerberg asserted that many people have underestimated “how fundamentally good mobile is” for Facebook Inc (NASDAQ:FB). He followed with a well-delivered three point explanation:

1. Mobile enables Facebook to reach more users than desktop;
2. Mobile drives more engagement per person than desktop; and,
3. Mobile will “make more money per amount of time” than desktop.

The first two points are fairly obvious — 5bn people have smart phones and that number far exceeds the total desktop Internet population of 2 billion. And mobile connectivity is easily accessed on the go, increasing the frequency of consumer interaction with Facebook Inc (NASDAQ:FB). The third statement is where the discussion gets interesting. Today, mobile usage chips away at Facebook Inc (NASDAQ:FB)’s core desktop advertising business, responsible for over 95% of total revenues. But if the core desktop platform usage is flat or shrinking in terms of minutes per person or ad impressions in economies with robust digital ad sales, there will be a soft transitional period.

Management continues focus on monetization:

The recent move to charge advertisers for offers on the newsfeed is a direct, somewhat intrusive step to monetize the mobile platform. Stifel believes this move and other steps to drive non-banner mobile ads in front of consumers will help the bottom line.

Stifel’s own channel checks highlight that Facebook Inc (NASDAQ:FB) is particularly concerned about ad effectiveness, challenged to distill intent signals from the user-verified contextual data. The measured usage of third party (non-Facebook) user intent data appears to be key to making Facebook ads work. This is different than the assumption many investors made — that Facebook would figure out monetization because it has unique or superior user data.

Maybe shares of Facebook Inc (NASDAQ:FB) fell too far and too quickly, and were due for a bounce. Perhaps the recent market rally has driven investors into high-multiple growth stocks and Facebook shares were there, oversold and trading at a valuation half of its IPO price. And just maybe the monetization prowess of Facebook on mobile devices simply required the company to focus on native apps (iOS and Android) instead of HTML5. If Facebook’s life as a public company were truly that simple, then it would not need to report earnings once a quarter to update investors on the its financial results.

It is also possible that CEO Zuckerberg resonated with investors more than he has before.  He did an impressive job handling tough questions from a tough interviewer, Michael Arrington.

Zuckerberg came off as an introspective, visionary – and mature executive, one who several times mentioned that the “mission and business” of Facebook go hand-in-hand. He spoke eloquently about how the company had to be reshaped
as a mobile company — redesigning its internal software production processes and increasing its efforts to improve the quality of its native mobile apps. Further, the 28-year old CEO stated directly that a “Facebook phone” made no sense strategically, while the company has “a team working on search” to go after the big opportunity from the more than 1 billion queries per day on the platform. His comfort level in front of an audience has significantly improved — at least compared with the somewhat infamous Swisher/Mossberg interview from AllThingsD a couple years back.

In summary, investors are far away from reaching the point where Zuckerberg should comfortably state that Facebook Inc (NASDAQ:FB) makes more money per amount of time on mobile than desktop. The numbers don’t back it up, at least not yet.  Investors assume that revenue upside from mobile is a bit further off than Zuckerberg was signaling. This makes us somewhat cautious on investor expectations heading into the September quarterly results.

Disclosure: No positions