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Facebook IPO: Key Concerns That May Haunt Investors

 May 10, 2012 02:29 PM

(By Mani) The most-anticipated IPO of Facebook is set to hit the market. But investors need to wary of a few things before they put their money in the stock.

The first and foremost concern among the investors will be Facebook's weak presence in the mobile department. The social networking giant, co-founded by Mark Zuckerberg, itself has admitted it in its S-1 registration statement filed with the SEC.

Facebook has 488 million monthly active users (MAUs) using the website on their tablets or smartphones in March 2012. This represents about 54 percent of its total MAUs of 901 million.

But, Facebook has not done enough to monetize these surging user base and that is a big roadblock given the exponential rate of growth in mobile usage over personal computers for the foreseeable future.

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Historically, Facebook has not shown ads to users accessing the site through mobile apps or its mobile website and thus not currently directly generate any meaningful revenue from the use of Facebook mobile products.

Facebook currently does not show advertisements on mobile devices as it currently does not have the technology to display ads on the small factor devices such as smartphones and tablets. Also, the company has no technology for mobile-payments and is yet to capitalize on emerging technologies such as Near Field Communication (NFC).

As a result, Facebook's revenue and profit would hurt if users increasingly access Facebook on tablets and smartphones over PCs, and Facebook is unable to successfully implement monetization strategies for its mobile users.

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"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 said in a regulatory filing.

Another hiccup on the investors minds would be the monetization strategies of Facebook. Facebook currently has two monetization mechanisms namely display ads, which is based on Cost per mille (CPM) impressions and performance based ads, which is based on CPC (Cost per Click).

Facebook gets major portion of its revenue from third party advertisements. In recent times, revenue contribution from ads have been declining. In 2009, 2010, and 2011 and the first quarter of 2011 and 2012, advertising accounted for 98 percent, 95 percent, 85 percent, 87 percent, and 82 percent, respectively, of its revenue.

This is because many of the advertisers spend only a relatively small portion of their overall advertising budget with Facebook.

In addition, developers seem not very keen to build applications (apps) and websites that integrate with the Facebook platform.

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