Does Facebook Need a New CEO?

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Facebook (Nasdaq: FB  ) reported earnings for the first time as a public company last week, and the results were mixed. Revenue was up 32%, which exceeded analysts' forecasts. And its adjusted net profit met expectations as well.

Investors were apparently hoping for more, however, and the stock dropped precipitously after the news. Facebook shares are now trading roughly 40% lower than the IPO price of $38 per share.

One commentator has already seen enough. Writing just after the earnings report, John Abell from Reuters wondered if Facebook needs a new CEO.

Zuckerberg isn't a hero
Abell noted the poor performance of the stock since the IPO, and then declared that "Facebook is a stock for the masses" and that the "masses need a hero." According to Abell, Zuckerberg is not that hero, because he's not playing to his strength, which is presumably "product strategy." Abell implies that Zuckerberg is not suited to the day-to-day grind of running a public company, and says he should "get out of the line of fire and retreat to the lab."

A pitiless smackdown
Sarah Lacy, founder and editor-in-chief of PandoDaily, responded mercilessly to Abell's commentary. First, she noted that founder CEOs have had extraordinary success in Silicon Valley, so tampering with that formula would seem very unwise. Just look at the tenures of Larry Page at Google and Steve Jobs with Apple and compare their performance with that of Hewlett-Packard and Yahoo!, which have both struggled in recent years to find effective CEOs who can lead their businesses. Throwing a founder CEO overboard may not be the best strategy, according to Lacy.

She also notes that Zuckerberg is the one who made Facebook what it is today, and that he has built "a site of unprecedented global size in a matter of years." That's what a CEO does, and Lacy feels Zuckerberg has been doing it better than "anyone else of this generation."

Short-term silliness
I think Lacy is absolutely correct in challenging Abell, though she may have been -- as June Cleaver might have said – a bit rough on "the Beaver." Zuckerberg has demonstrated great leadership abilities in building a company that now has more than 950 million users. Marc Andreessen, who sits on Facebook's board, told Charlie Rose recently that Zuckerberg has worked really hard at teaching himself to be CEO. In addition to having built one of the best teams in Silicon Valley, Zuckerberg is a magnet for talent, according to Andreessen. That's something that Steve Jobs was noted for as well.

Abell's desire for a CEO change is a perfect illustration of the market's short-term attitude toward Facebook. Is it really possible to understand Facebook's future based on one quarter's worth of results? One of its most promising initiatives, Sponsored Stories, is just getting started. Is a couple of months enough time for investors to accurately assess its future prospects? Was there anything else from the earnings release and conference call that warranted a 14% haircut in the share price?

Of course not. And when market commentators continuously talk of how investors have "lost money" in Facebook, it completely ignores what might happen in the future for long-term investors of the company.

Zuckerberg clearly understands this. On the conference call, he admitted that he was disappointed in the performance of the stock so far. But then he added:

I think the important thing for us is to stay focused on the fact that we are the same company now that we were before. We've got the same opportunity in front of us to build something really important and valuable over time, and if we stay focused on building great products, we expect and we want to be judged based on the quality of the experiences we build, and the value we can create over the long term.

That last point is key to me. The market right now is obsessed with judging Facebook over a short-term time frame, while the company is focused on creating long-term value. For those investors who can drown out the noise, Facebook could be a very compelling long-term investment opportunity. That's why my colleague David Meier and I own shares in our real-money, 10-Bagger portfolio.

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John Reeves owns shares of Apple and Google. You can follow him on Twitter @TenBaggers.

The Motley Fool owns shares of Facebook, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Google, Facebook, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days..

Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 30, 2012, at 5:36 PM, Hestheone wrote:

    Will Motley Fool ever stop pimping for Facebook? FB is a loser because of...get this...the IPO was fundamentally unsound. Facebook could be a minimally profitable business but it will not be because any profit it could have generated it has already distributed. Subtract the value of the shares given away from revenue Facebook can expect to earn and you have a business running in the red for the foreseeable future. Changin players will only make matters worse as FB will have to bribe someone to trade their reputation for stock and options that continue to slide downwards. The water has already been poisoned for anyone greedy enough to come in and try to turn things around.

  • Report this Comment On July 30, 2012, at 6:21 PM, matthewluke wrote:

    It is also rather pointless to even suggest it. Which is what Abell points out at the very end of his article (because pointing that out at the very beginning of the article... lol).

    If anybody wants to invest in a company where you could shortsightedly oust the CEO after a single quarter as a publicly-traded company, Facebook was definitely the wrong company to invest in. The dual-class share structure is such where if Zuckerburg doesn't want to go, he isn't going anywhere. If you want to ability to remove a CEO at any point in time, you need to find a different company.

    I'm not the biggest fan of dual-class ownership (and don't own Facebook), but that's the situation as it stands. If anybody want to invest in Facebook, you are essentially just along for the ride. Zuckerburg is driving this car, for good or for ill.

  • Report this Comment On July 31, 2012, at 2:13 AM, xomi wrote:

    Marc Andreessen also stated that Zuckerberg is the greatest CEO out there. I agree. He has created a dividend paying corporate structure populated with great talent in a highly abbreviated time frame to accomplish the specific aims undergirding his vision. FB in its corporate governance is technically more than Zuckerberg; however, the governance understands the rare and creative talent that characterizes their CEO, something that Apple took some time to appreciate in Jobs . . . And within Zuckerberg is the visionary leadership of how FB will proceed as a public for profit corporation. You either invest in Zuckerberg or you don't . . . because it would appear very few out there are imagineering new paradimes of online user participation radiating value through behavior rather than just through consumerism. If the markets are insisting upon defaults into a dotcom mentality of monetizing online activity, then FB stock will drop in share price but it will not impact the outcome of Zuckerberg's vision. FB is steadily approaching 1B users. Invest or not, the world is about to change very quickly and FB is the epicenter of this fundamental change. Google, Apple, and Microsoft know it. The Chinese are afraid of it. Andy Warhol predicted it. Anyone who knows how search engines work---and appreciate the critical future of a new generation of search engines---- immediately appreciates the useful value of the statistical power latent in the behavior capture of FB. What empirical analysis of human behavior has ever had an N=1B . . . and with such levels of granularity?

  • Report this Comment On July 31, 2012, at 1:33 PM, Slizer6893 wrote:

    Can we stop discussing Facebook? These articles are not helping the fact that this company is run by an arrogant computer jock. While his intentions of the site were sound his actual implementation is dreadful. The company will have a short life as new products that are more original come out. Why don't investors/baby boomers see that this site is a knock-off of numerous sites. The large number of users is hardly a view as the success and the CEO is an overgrown child. Lets take some advice from our fellow investors, Facebook is not the company to invest in nor will it ever be. Its lifespan will inevitably be short as privacy issues continue and the hackers start to get in on the amount of data Facebook holds. Its only a matter of time before Zuckerburg jumps out to his fortune and leaves the company behind him.


  • Report this Comment On July 31, 2012, at 3:01 PM, TheRealRacc wrote:

    Age-old adages don't survive centuries for no reason. You can talk the talk, can you walk the walk? So far, no.

    "We expect and we want to be judged based on the quality of the experiences we build, and the value we can create over the long term."

  • Report this Comment On August 07, 2012, at 4:41 AM, Jackpeterson007 wrote:

    John is spot on here. Does anyone remember the name of the former CTO at Facebook, who left a few weeks ago? Does anyone care?

    I can see no one at the helm of Facebook, no vision, no direction.

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