This week, investors will get their closest look yet at exactly how Facebook plans to make money.
The world’s most popular social network reports its first ever quarterly earnings as a public company on Thursday. The earnings announcement comes after a somewhat inauspicious start to Facebook’s life on the NASDAQ stock exchange.
After months of hype, Facebook shares finally hit the NASDAQ last May, but then immediately slumped. In addition to technical glitches on the first day of trading, Facebook’s stock price was hurt by a growing concern among investors that the company, while hugely popular among its mostly non-paying customers, had little means of generating enough revenue to justify its extremely high valuation.
In particular, investors will be looking at three things in Facebook’s earnings announcement. The first is signs of a mobile strategy. Despite amassing almost a billion users, the social network has admitted it has little idea how to generate cash from advertising on phones, tablets and other mobile devices, which a growing number of its members use to access the site. A number of Facebook’s competitors, such as Google, have tried to take advantage of this weakness by focusing more of their efforts on mobile-first products.
Second, investors will want to see signs of diversification in Facebook’s revenue stream. According to regulatory filings, the company still makes a significant portion of its money through its relationship with a single partner, online game-maker Zynga. That leaves Facebook particularly vulnerable should users lose interest in Zynga’s suite of largely simplistic social games (although the popularity of Zynga hits such as Farmville remains very high).
Third, investors will want to hear about geographic expansion. Although Facebook has high market penetration in many countries around the world, it has so far still failed to make much of a dent in some of the fastest-growing markets in the world – chiefly, China.
Even though Facebook’s shares haven’t performed well since hitting the open market, they still imply a very high valuation for the company. That makes Facebook’s first earnings announcement particularly dangerous. Should the company fail to prove it is on the kind of meteoric growth trajectory that would justify its valuation, its stock price could easily tank as a result.
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