Brendan Byrnes: Hey, Fools, I'm Brendan Byrnes and I'm joined today by our Senior Technology Analyst, Eric Bleeker.
Eric, Facebook's (FB 0.55%) been in the news a lot recently. Reported earnings actually seemed to maybe beat expectations by a bit, but yet the stock was down. What do you think, overall? What's your take on earnings?
Eric Bleeker: I wouldn't look too much into pricing on Facebook, because it's up over 40% across the past six months. Sometimes people are just taking profit. "I have an announcement," you know?
Brendan: Do you think that sell off got a little ahead of itself, back when it was in the teens?
Eric: [laughs] It's at $30 today, you would expect so.
The thing with Facebook right now is it's riding a couple contrasting forces. A year ago, everyone was saying, "Facebook's the new platform. It's the new Windows. Check out Zynga (ZNGA +0.00%) building itself. All of these companies are going to come and build upon Facebook."
It's like, "Sorry. Facebook's not the platform. iOS and Android are the platform you're building on in the mobile age," so that never played out. We see its platform revenue really starting to stagnate, but they came back and now mobile is the opportunity.
Brendan: Zuckerberg called it "very much a mobile company" now.
Eric: Yeah, he says they're a mobile company now, and that's an interesting storyline. The headlines are hard to ignore. We look at 23% of the revenue being mobile. Six or seven months ago, they didn't even really have any mobile advertising to speak of. Incredible growth rates.
The one thing I would caution investors to do, it's so easy to get caught up on how positive that storyline. Just one area to take heart though; just remember, whenever you roll out some kind of new advertising, it's going to be very effective at the start. As people learn that it is a form of advertising, they tend to ignore it.
You look at banners on the side of web pages. Everyone ignores them. No one clicks them. It's called "banner blindness." Over time, though, the promoted stories, you need to see how it performs not in its second quarter, but four or five quarters down the line, because if people begin ignoring them, it might not be as disruptive an idea as possible.
It's interesting because it puts advertising directly in your stream of information. Why is television really successful? The advertising is within the stream of content you want, so it's foundationally changing advertising.
That being said, I think to look at only one or two quarters and say, "This is unqualified success, and Facebook's going to $200 billion" wouldn't be the right move either. Just a note of caution there.
Brendan: Looking longer term, do you think Facebook needs to do different things as far as advertising goes? Reach out beyond what they're doing currently on their mobile platform?
Do they need to get more creative, I guess is the question.
Eric: People talk about things with Facebook like platform and gifts, and it's like, "Stop."
Google (GOOG +0.20%). Let's do a comparison. You look at Apple (AAPL +3.26%), trading at 10X earnings, Google at 23X earnings. What's the difference? People think that Apple's addressable market, high-end smartphones, is running out of growth.
Google's addressable market is advertising, which has seemingly limitless growth so you're always willing to pay for more growth if the market's so large.
Facebook's largest opportunity remains to be advertising. Their challenge has always been to do something foundationally different, because if you're just a regular website with banners on the side, well we've seen from Yahoo!'s 10-year chart how that goes. You need to be able to change up.
That's why I applaud them for doing mobile. They've done a great job, but they're not going to stop there. If there's one thing to be said very complimentary about Facebook, they never stop experimenting. They're always messing around with things.
They know that this is their opportunity. They're adjusting to it. I wouldn't bet against the company. I think it's richly priced today, but there's definitely some very high upside if they can figure this out.
Brendan: Definitely an interesting one to watch. Thank you, Eric. Thanks for watching. Head over to Fool.com for more analysis.
