Facebook’s plan to spend next year pouring more money into its new products was greeted with caution by a wary Wall Street, uncertain just how much spending is too much.
Mark Zuckerberg, founder and chief executive, said it may sound “a little ridiculous”, but Facebook is waiting for newly acquired products such as Messenger, WhatsApp and Instagram to reach 1bn users each before beginning to try to generate revenue from them.
Investors may have agreed, wiping over $20bn off the company’s market capitalisation in after-hours trading during Facebook’s third-quarter earnings call when they heard how much that plan might cost.
Facebook forecast costs will rise by 50-70 per cent next year on a non-GAAP basis, or by 55-75 per cent on a GAAP basis. This would far outpace the average analyst forecast for revenue growth of about 35 per cent, although Facebook did not give its own revenue projections.
But Mr Zuckerberg, who has built the main Facebook site and app into a business with 1.35bn users, set out his theory of investment as one that is “to first focus on connecting 1bn people, reaching the full potential before aggressively turning them into new businesses.”
“I can’t think of that many other companies or products that have multiple lines of products that are on track to connect 1bn people,” he added.
Brian Wieser, an analyst at Pivotal Research, cites Google as one such example – another founder-led Silicon Valley company that has used the money made from its core product (in its case, search) to invest prolifically in other areas.
“The closest peer here is Google and that’s not a positive comparison in terms of rapidly increasing expense growth,” he says.
But Mr Wieser says Facebook compares favourably with Google because it is flagging the increased expenditure in advance and seems to have more of a “investment focus” than its rival.
Facebook’s multi-app strategy is centred around the idea that there are many ways to “connect the world”, whereas Google is taking money from its lucrative search advertising business for big bets that range from driverless cars to finding a “cure” for death.
Few argue that Facebook is heading in the wrong direction, but many feel it lacks the tools to assess exactly how much money it needs to invest.
The problem Wall Street generally encounters when trying to value Silicon Valley companies is low visibility about where they are spending their research and development budgets.
It is difficult to predict if Facebook could use existing money to grow, developing, for instance, WhatsApp by reallocating engineers and servers or whether that would require extra resources.
Mr Wieser says few analysts gave the company a “haircut” when it acquired WhatsApp in February in a deal now worth $22bn, in spite of its diluting the share count and Facebook’s statement now that it would be one of the factors prompting accelerated expenditure.
“No company of this size and growth rate is normal. If you are P&G, investors can quibble about the appropriate expense ratios as the business is relatively predictable and you have decades of history to inform what the company will do, and dozens of peer companies,” he says.
The extra costs announced on Tuesday include spending in an attempt to grow this year’s acquisitions of WhatsApp and Oculus VR, the $2bn virtual reality headset maker. The market has already responded favourably, sending shares in Facebook up by almost half so far this year.
WhatsApp’s financials, published for the first time on Tuesday, showed a little revenue and widening losses because of stock-based compensation for employees. But Facebook has emphasised that the app was not bought for its current business model.
Other additional costs will be for hiring more people, investment in infrastructure and the expansion of Facebook’s advertising technology business – which Jan Rezab, chief executive and founder of Socialbakers, a social media marketing company, identifies as an obvious area for development.
Sheryl Sandberg, chief operating officer, says Facebook could use the tools it has created to improve targeted marketing on its site, and the acquisition of the Atlas ad serving and management platform for ads across the web.
“It’s clear that marketers and publishers need better tools for the mobile world,” she says. “This is an industry problem that we believe we are well-placed to solve.”
Mr Rezab says the fact that Facebook now makes two-thirds of its revenue on mobile shows it could play a leading role in advertising technology.
“The industry doesn’t know what it is doing. That is a clear fact,” he says. Facebook “can lead it and own it and solve it”.