Imagine The Upside If Facebook Solved Its Biggest Problem

By StreetAuthority | August 01, 2013 AAA

Facebook (Nasdaq: FB) jumped to over $34 last week, marking the first time since its IPO that the stock has traded that high. This came after a one-day climb of nearly 30%.

A great one-day move, right? But let's put it in perspective: Since its May 2012 IPO, FB is still down more than 3%.

The social network blew through both earnings and revenue expectations. Second-quarter earnings per share came in at 19 cents, compared with the consensus forecast of 14 cents and the 12 cents a share posted during the second quarter last year.

In reality, all of Facebook's numbers were up big-time: Total monthly active users were up to 1.15 billion, up 20% year over year; mobile monthly active users were up to 819 million, up 51%; and daily active users were up to 699 million, up 27%.

The real gem? Mobile ad revenue came in at $656 million, up 76% from the previous quarter. Mobile ad revenue now makes up 40% of total ad revenue, compared with 30% of total ad revenue during the previous quarter.

Many investors believe that Facebook has finally hit the turning point and figured out how to monetize mobile. However, the question is, what's next? The company appears to have a lot of growth priced in, trading at a trailing price-to-earnings (P/E) ratio of 174, a price-to-sales ratio of nearly 15, and an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of 27.

Even with this expected growth priced in, the company has an opportunity for serious upside. It's simple, really.

Replace Mark Zuckerberg as CEO.

Is Mark Zuckerberg holding back Facebook's growth?

There's a serious problem with keeping the founder as CEO once the company goes public. Running a public company is very different than running a startup. There are different challenges and goals, as well as the challenges of a shareholder mentality. As a startup, you're accountable to yourself and venture capitalists -- but as a public company, your shareholders look very different.

Unlike venture capitalists, who are more interested in product building and revenue growth, shareholders in a public company are much more interested in earnings. Many startups are accustomed to burning cash at rapid rates and losing money on an earnings basis. A new Facebook CEO with public company experience could be just what shareholders need to really launch the stock.

While there are founder CEOs who have gone on to have great careers, the trend of late is that publicly traded companies have performed better under a CEO with previous management experience at other public companies.

Reversal Of Fortunes
Groupon (Nasdaq: GRPN) is an example of a company that has flourished after the ouster of a founder lacking in management experience. When Andrew Mason -- who worked as a Web developer before founding Groupon -- was fired as CEO on Feb. 28, the online coupon company was down 80% from its initial public offering. Since his departure, Groupon is up 45%, compared with a 13% gain in the Nasdaq.

Similarly, the mobile gaming company Zynga (Nasdaq: ZNGA) ousted its founder CEO, Mark Pincus, on July 1. Prior to Zynga, Pincus had no management experience at a public company, though he had worked in venture capital and as a financial analyst. From its December 2011 IPO to Pincus' exit, ZNGA was down more than 40%. Since Don Mattrick -- a former president of Microsofy's Interactive Entertainment Business -- took the helm at Zynga, however, the stock is up just over 5%, in line with the Nasdaq's advance in the same period.

Steady As She Goes
For an example of a maturing company continuing on a growth path under its founder, consider the online review site Yelp (Nasdaq: YELP), which has kept founder CEO Jeremy Stoppelman at the reins. Stoppelman left e-payment firm PayPal, where he was vice president of engineering, to go to Harvard Business School, where he teamed with other PayPal executives to create Yelp. Since its March 2012 IPO, Yelp is up more than 60%, compared with a 20% gain for the Nasdaq.

Another PayPal alum, Reid Hoffman, left an executive vice president position to start LinkedIn (Nasdaq: LNKD). Since LinkedIn's May 2011 IPO, LinkedIn is up more than 110%, more than quadruple the Nasdaq's 26% gain.

Kayak Software is the travel booking website that was recently snatched up by Priceline (Nasdaq: PCLN) for $40 a share. Before founding Kayak, CEO Steve Hafner helped found Kayak's rival travel site, Orbitz, where he was in charge of marketing and business development. Kayak's buyout is a 20% premium to its initial trading price after its July 2012 IPO -- and a 50% premium from the stock's all-time low in August 2012.

Executive Ranks

Noting that Facebook could move higher with a new CEO is not to say that the social network doesn't have some great executives. Chief Technology Officer Mike Schroepfer served as CTO of Sun Microsystems' data automation unit and Mozilla's vice president of engineering. Chief Operating Officer Sheryl Sandberg was previously Google's vice president of global online sales and operations and served as chief of staff to former Treasury Secretary Larry Summers.

What are the chances of a Zuckerberg ouster? Not good. Zuckerberg has almost complete control of the company, commanding more than half of the voting shares and serving as both chairman and CEO.

With Zuckerberg holding the majority of the voting power, Facebook is a "controlled company," meaning it does not have to have the majority of its directors be independent. With all that said, why would Zuckerberg ever fire himself? Chances are, of course, that he won't. The stock would have to take a great deal of punishment from shareholders to convince Zuckerberg that it's time to go.

Action to take --> Avoid Facebook after its recent run-up. Zuckerberg isn't going away anytime soon, and one great quarter doesn't necessarily signal a true turning point at Facebook.

comments powered by Disqus
Related Analysis
  1. Consumer Spending Keeps In Line - Ahead of Wall Street
    Stock Analysis

    Consumer Spending Keeps In Line - Ahead of Wall Street

  2. Bear of the Day: IXIA (XXIA) - Bear of the Day
    Stock Analysis

    Bear of the Day: IXIA (XXIA) - Bear of the Day

  3. Bull of the Day: Southwest Airlines (LUV) - Bull of the Day
    Stock Analysis

    Bull of the Day: Southwest Airlines (LUV) - Bull of the Day

  4. Barron's Recap: Investing Like A Tech Tycoon
    Stock Analysis

    Barron's Recap: Investing Like A Tech Tycoon

  5. Hodgepodge Leads to Sell-off - Ahead of Wall Street
    Stock Analysis

    Hodgepodge Leads to Sell-off - Ahead of Wall Street

Trading Center