How Facebook Can Reclaim Its $100 Billion Valuation

Douglas A. McIntyre

While most of the media coverage about Facebook Inc.’s (NASDAQ: FB) stock price has focused on whether it can reclaim the $38 IPO level, just as important is whether its market cap can reach $100 billion, the magic valuation that made Facebook the darling of Web 2.0 investments. The answer is not merely that Facebook’s revenue needs to grow. It needs to grow in the area of high CPM ads, where so far it has been a failure.

The upward move in Facebook’s stock was triggered by its second-quarter earnings. Revenue grew to $1.813 billion from $1.184 billion in the same quarter a year ago. By the yard stick against which Facebook is often measured — Google Inc. (NASDAQ: GOOG) — the figure is still terribly small. Facebook made $0.13 per share on a GAAP basis, compared with a loss of $0.08 in the second quarter a year ago. Net income on the same basis was $333 million, modest when set next to Facebook’s nearly $92 billion valuation.

Wall Street was most excited by a number that actually may hurt Facebook over time:

Mobile advertising revenue represented approximately 41% of advertising revenue for the second quarter of 2013.

The irony of mobile advertising is that almost all large Web properties crave it, while at the same time being concerned about the eventual damage it could do to their profits. Every large online site has sophisticated apps for both smartphones and tablets, the downloads of which they promote incessantly.

However, the CPMs for mobile ads tend to be well below what marketers will pay for ads which appear on PCs. That is especially true of highly profitable video ads. Marketers dislike creating expensive ads that appear on tiny screens. The race to mobile, in other words, is a race toward zero when it comes to creating revenue growth and profit.

The disadvantages of mobile mean that Facebook will need to draw online video ads to its PC-based website. Google is well ahead of Facebook because of YouTube, but it is notable that Yahoo! Inc. (NASDAQ: YHOO) and other portals have taken the initiative to create large inventories of premium video content, much of which they create themselves or build in partnerships with TV and movie producers. In this segment of the industry, Facebook sits well behind the leaders.

So, Facebook has at least one large hurdle as it struggles to return to a $100 billion valuation. As it brags to Wall Street about its mobile prowess, it has to post a huge success with video advertising, too.