Why Search Marketers Should Watch Facebook's Stock Price

Mafnifying-Glass-Eye-AAnything that increases Facebook's stock price is bad for search engine marketers, according to Needham & Co. Managing Director Laura Martin. For starters, the events pushing up the price move clicks from the open Web behind closed walls.

"We're experiencing the rise of closed systems," Martin told MediaPost. "Apple is a closed system. Facebook is a closed system. Search engine marketers require an open Internet. Recommendations and ecommerce are moving behind walls. What does that do to the future of search engine marketing? Search results will become less relevant, as more data sits behind closed walls."

Martin initiated coverage of Facebook stock Thursday with a buy rating of $40 as the target price. And while the report speaks to financial investors, through the numbers Martin provides insights to search marketers.

While social campaigns are not related to the stock price, "any positive growth metric for Facebook could be bad for search engine marketers" because it moves open traffic sources that traverse the Internet into a walled environment, Martin said. "Facebook puts the data behind a closed wall that search engine marketers can't reach."

Google CEO Larry Page recently voiced his frustrations with Facebook locking up member data, referring to the social network as holding "users hostage."

Facebook uses the social graph to generate revenue for business by calling up recommendations from friends based on ZIP codes. If the reservation at a restaurant is made from a recommendation through OpenTable, Facebook gets paid. Martin said those clicks in the walled environment are not made across the open Web.

In the research note, Martin wrote that money follows time. "Facebook represents about 14% of time spent online, suggesting its revenue potential is $14 billion globally and $6 billion from the U.S. alone, calculated as 14% of Zenith’s global Internet revenue estimate of $98B and eMarketer's U.S. Internet estimate of $46B in 2013," she explains.

As examples of other Internet-driven platform companies that went through initial public offerings (IPO), Martin compares and analyzes the life cycles of Google's, Yahoo's, and Facebook's user, revenue and market cap metrics. When referring to risks, she brings up monetization rather than adoption, which had been considered the social network's shortcoming prior to the IPO.

"Advertising, payments, ecommerce, social graph services -- since we believe that money follows time, we also believe the FB platform offers several ways to solve the monetization puzzle," Martin wrote.

High member rates and relatively low campaign costs attract search engine marketers to Facebook, although the platform lacks a string of proven campaign examples. Marketers can get by with little investment on Facebook, compared with those in Google AdWords or Microsoft adCenter.

No doubt, search marketers will continue to try to work through the challenges and the nuances of launching successful ad campaigns on the social site. Ask Marty Weintraub -- aimClear founder and author of "Killer Facebook Ads" -- about success stories, and he would likely direct marketers to a page in the back of his book with a list of examples. A checklist also tells marketers to set key performance indicators (KPIs), designate payment methods, set targeting attributes, design ads, determine budgets and bids, and confirm that the analytics package picked can verify the chosen KPIs.  

Facebook boasts 900 million monthly users, but the social network fails to successfully monetize the platform. Martin calls attention to "enormous" and "expanding" operating margins of 33.7% in 2009, 52.3% in 2010, and 47.3% in 2011. It turns out that Facebook's margins are double those of Google at a similar stage of growth. Martin estimates with the social network's 3,500 employees, operating leverage is maximized as revenue grows. She writes that "lower risk should be coupled with a higher valuation, yet FB’s EV/revenue multiple is below both YHOO and GOOG at their IPO dates."

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2 comments about "Why Search Marketers Should Watch Facebook's Stock Price".
  1. Ross Bradley from Qeg Pty Ltd , May 24, 2012 at 9:30 p.m.
    You make some great points in your article, Laurie.... And I agree, with the following: < "We're experiencing the rise of closed systems," Martin told MediaPost. "Apple is a closed system. Facebook is a closed system. Search engine marketers require an open Internet. Recommendations and ecommerce are moving behind walls. What does that do to the future of search engine marketing? Search results will become less relevant, as more data sits behind closed walls."> In my own 'blog-post' (and my comment on your article, made just today) I'm now suggesting that a CPA/CPV marketplace is the 'solution' and that with such, Facebook Ads (like Google and other SE's) can then sell these same (CPA/CPV) Ads to marketers - seeking those same (hot to trot) 'in market' users - who (in fact) spend a great deal of their time, on Facebook. http://seekingalpha.com/instablog/36191-lookingconfident/657141-greed-not-facebook-will-bring-down-the-web RossJB
  2. Rob Schmults from Intent Media , May 29, 2012 at 8:44 a.m.
    Not sure I follow the logic here. If the thesis is that people are dropping search engines as a way to find the products and services they want, and instead shifting to using Facebook to that end, then I guess it's a problem for Google and Bing. Assuming FB wants a business model, they would welcome marketers chasing these visitors onto FB and into their closed system. But is that actually happening? It seems more logical that future FB growth is not going to come at the expense of the search engines (much less Search marketers) any more than it's past growth did. Until and unless FB comes up with a better way for people to efficiently find goods and services, they can have their closed system and Google and Bing will carry on just fine.