It’s been one year since Facebook Inc (NASDAQ:FB) went public. Its highly anticipated $100 billion IPO added a cool $6.8 billion to its coffers, bringing Facebook’s total assets to over $12 billion at the time. What has since happened to all that money, and why should it matter to investors?
Facebook’s prospectus noted that the company didn’t have any specific ideas on how to use its IPO proceeds. But without a clear vision, companies can waste large amounts of money easily — and quickly. Investors are hoping Facebook Inc (NASDAQ:FB) will intelligently shell out its cash to grow the business and eventually justify its forward P/E of 35. But the company’s previous purchases haven’t always seemed wise.
What We Learned From Instagram
One month before Facebook went public, it shocked analysts around the country by acquiring Instagram — well known for its photo-sharing app — for $1 billion. Whether or not Instagram was a quality acquisition, it seems that Facebook grossly overpaid.
If Facebook Inc (NASDAQ:FB) bought Instagram in order to take part in a growing social picture experience, then it hit the jackpot. At the time of its purchase, Instagram had 25 million-30 million photo-snapping users. Now, just a year later, there are 100 million-plus. But if the goal was to make money, well — the app still brings in $0.
Shutterfly (NASDAQ:SFLY) shares plummeted nearly 20% with the news of the Facebook – Instagram tag team. Those fears have now subsided, since Instagram images can be uploaded and printed with Shutterfly’s service. The latter company has even rolled out its own app to better combat Instagram.
One might wonder why Facebook Inc (NASDAQ:FB) didn’t just buy Shutterfly. The company was valued around $1 billion at the time:
SFLY Revenue Quarterly data by YCharts
Those numbers aren’t too pretty, but Shutterfly’s $117 million in quarterly revenue is a good start. Also note that by offering a fully integrated service with Instagram, Shutterfly has actually been more successful than Facebook in monetizing the app. There are uncertain rumors that Instagram may run ads one day, which could start paying back Facebook Inc (NASDAQ:FB)’s investment. But for now, we’ll have to wait and see.
Show Me the Money
Here’s a look at Facebook’s financial situation since going public.
FB Revenue Quarterly data by YCharts
Does it surprise you that the company is still loaded? That’s right — Facebook hasn’t spent its allowance yet. Becoming profitable has helped keep its cash assets as high as they are. Last quarter, Facebook generated $392 million in free cash flow.
But don’t be fooled into thinking that Facebook isn’t buying anything. Recently, it announced the acquisition of Microsoft (NASDAQ:MSFT)‘s advertisement branch Atlas. Many analysts see this as a direct assault on Google (NASDAQ:GOOG)‘s ad empire.
A more conservative view suggests that Facebook is looking to improve the revenue it gets from its existing advertisements. Atlas helps advertisers assess and analyze their ads. If advertisers can see the effectiveness of the ads they are running, they’re more likely to increase spending on advertising — and thus create revenue for Facebook. Whether as an assault on Google or an improvement on Facebook’s ad system, buying Atlas is a bright move.
But for Microsoft, selling Atlas is an admission of failure. Atlas was a part of aQuantive, which Microsoft purchased for $6.8 billion in 2007. That purchase was seen as the move that would help Microsoft catch Google in advertising revenue … which never happened. It’s true that Microsoft’s ad revenue from Bing grew 18% in the most recent quarter, to $832 million. But that still pales in comparison to Google’s $11.9 billion, and lags behind Facebook’s $1.25 billion.
Online ad forecaster ZenithOptimedia predicts that internet advertising revenue will surpass revenue from traditional sources by 2015. If that’s true, it means Facebook is investing where it counts.
Fellow fool blogger Leo Sun also described Facebook’s tantalizing opportunity to potentially acquire Israeli mapping company Waze. A buyout would allow Facebook to throw off Bing maps, and increase the usefulness of its location features.
Loads of cash without a clear-cut vision is generally a recipe for recklessness. But Facebook still has tons of cash. We see that it’s spending that money in certain meaningful areas, rather than on a random spree. So really, the Instagram acquisition taught us that Facebook wants to spend its money carefully — but it’s not afraid to pull the trigger when it sees an opportunity it likes.
Outstanding Opportunities
Smartphone penetration has now reached 58% according to comScore, and 37% of all internet use is accessed from a mobile device. With that in mind, Facebook’s recent moves to beef up its attention to mobile details makes sense.
First, the company has been spending to take advantage of mobile opportunities. Mobile revenue comes from ads, and unfortunately, ads can’t just be “thrown onto” mobile Facebook accounts — it takes infrastructure and employees to do so. With these expenditures, Facebook has successfully grown its mobile revenue to 30% of its total revenue. At this pace, it is expected to snatch up 13% of the market, second only to Google, with plenty of room left to run.
Second, the company released the highly anticipated “Facebook Phone” that fully integrates the Facebook and smartphone experience. The jury is still out to whether this product was a worthy offering. Rumors have it that the phone may be nixed soon due to the Home app — the app that makes it a Facebook phone — only being downloaded 1 million times in the first month. But a failure during this first go-round could lead the company to launch an even better product down the line.
Takeaway
Facebook is in the right ballpark, but it’ll need to leverage its money stash to hit a home run here. While I don’t recommend basing your entire opinion of a company on a single quarter, I do recommend keeping a close eye on Facebook’s next quarter to see how mobile revenue grows for the company. Also, if the Facebook phone does indeed get discontinued, listen to what Mark Zuckerberg has to say about any upgrade down the road.
The article What Happened to Facebook’s Money? originally appeared on Fool.com.
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