Breakout

New Facebook IPO Filing Highlights a Huge Profitability Challenge

Jeff Macke
Breakout

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Late yesterday Facebook (FB) updated their S-1 statement for the sixth time to more specifically address the risks related to monetizing users moving from traditional desktop computers and laptops to tablet devices. While prior editions of the IPO filing outlined general risks of creating a mobile-friendly platform, this is the company's first admission that the pace of users migrating to mobile devices is reducing the rate of revenue growth. Here's how they explained it:

"We have historically not shown ads to users accessing Facebook through mobile apps or our mobile website. In March 2012, we began to include sponsored stories in users' mobile News Feeds. However, we do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven. We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered." -Facebook Amended S-1 Registration, Page 14

Should you care? In the attached clip Nesto dismisses the amendment as being more "about lawyering and pre-arguing class action lawsuits and shareholders that might come in the future," than anything important. Sort of a pre-10Q, if you will. From that perspective Facebook is disclosing what amounts to a good problem. In effect announcing "our mobility business is growing so fast we can't sell ads enough."

Which isn't exactly what Facebook is saying. By their own accounting over half of Facebook's 900 million Monthly Active Users access the site through mobile devices. Most of these use Facebook via both traditional computers and tablets and/or smartphones. However, and here's the rub, those who only use Facebook via mobile devices are currently generating no meaningful revenue whatsoever.

The problem isn't that the number of mobile users is growing so fast that Facebook can't sell them ads fast enough. The problem is Facebook hasn't figured out how to sell ad space on mobile devices at all. At least not yet. Facebook isn't getting meaningful growth from its most rapidly growing user base. Tablets and smartphones unit sales are growing around 20 - 50x faster than PCs and Laptops. Do the math.

Nesto says it doesn't matter and only "speaks to opportunity." Facebook is a smart company and will figure out a way to "monetize" mobile users just as it is slowly getting revenues from the traditional user base.

He may very well be right. But there's a reason the Risk Factor segment of an S-1 exists beyond pre-lawyering. In this case Facebook added details about its inability to generate revenue from mobile users because it's actually a huge risk to future profitability. Such details will have no impact whatsoever on the IPO or the stock itself during Facebook's IPO honeymoon period.

If FB hasn't solved their mobility problem by the time the honeymoon ends, shareholders are going find out what risk really means.

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