Facebook: Skyrocketing Stock Price 3.5 Years After Botched IPO

Facebook chief executive and founder Mark Zuckerberg waves to the crowd as he arrives for a 'town-hall' meeting at the Indian
Facebook chief executive and founder Mark Zuckerberg waves to the crowd as he arrives for a 'town-hall' meeting at the Indian Institute of Technology (IIT) in New Delhi on October 28, 2015. Speaking to about 900 students at New Delhi's Indian Institute of Technology, Zuckerberg said broadening Internet access was vital to economic development in a country where a billion people are still not online. AFP PHOTO / Money SHARMA (Photo credit should read MONEY SHARMA/AFP/Getty Images)

What a difference a few years make. Over the past year, Facebook shares have jumped roughly 38 percent. Just reported third-quarter earnings are 57 cents per share on revenue of $4.5 billion -- exceeding analyst expectations of 52 cents and $4.37 billion respectively. Facebook has learned that one of the best ways to increase the stock price is to exceed analyst expectations. It was not always so.

IPO mistakes disappoint the markets

When Facebook went public roughly 3.5 years ago, its executives conducted a road show to generate interest in their stock. The anticipation of the IPO was already high as a result of the secondary market that developed. Therefore, the road show proved counterproductive because detractors spun it as an example of overselling, or hyping the stock. Overselling is rarely good. It is what inexperienced sales people do when they are insecure about their product. Veterans, such as Apple, often understate performance to set lowered expectations. They know that beating expectations will make the stock price pop, whereas falling short of expectations has negative side effects, such as a falling stock price, lawsuits, and a tarnished corporate image. The hype during its road show set an expectation level that was bound to disappoint, and it did. The opening stock price of $38 per share went down quickly and hit a low of $17.73 in the summer of 2012. Then, it fluctuated during the first year in the low to mid-$20's.

What's going on now?

Leaving its IPO mistakes in the past, Facebook appears to be firing on all cylinders. From a marketing perspective, it has created an ad platform that gives marketers what they want while engaging the eyeballs of users that advertisers crave. Here's a summary of just some of the data just released:

  • Monthly Active Users. Jumped to 1.55 billion - 14% higher than the year before.
  • Daily Active Users. Increased even more to 1.01 billion - a 17% jump over the previous year.
  • Ad Revenue. Climbed to4.3 billion - a whopping 45% jump over the previous year, and 78% of that is mobile ad sales, which is up 66% from the year before.

Scale and engagement

With a growing audience that numbers 1.55 billion, Facebook has unprecedented scale and reach. To give you a point of comparison, the average Super Bowl audience is between 110 and 117 million. Facebook has 1.01 billion daily active users, and unlike Super Bowl watchers that are distracted by parties and food, Facebook users are highly engaged. According to ComScore...

"Facebook remains the goliath of social media, leading all social networks with 81 percent reach of the total U.S. digital population and nearly 230 billion minutes of user engagement. With time spent that is 18 times that of the next biggest social network."

Lower cost

While Super Bowl ads cost a small fortune (a 30-second spot on the 2016 Super Bowl will cost $5 million), Facebook ads are far more affordable. According to Jack Marshall in Digiday...

"if you invested $4 million (which bought you only 30 seconds on the 2014 Super Bowl), you could buy 14 billion Facebook ads - giving you a new ad every second for 469 years."

Not only that. Facebook ads are in the news feed rather in distracting and interruptive places, and users can share their endorsement of the companies and products they like with friends and family.

Highly targeted

One of the reasons Facebook ads cost considerably less is advertisers are able to better target specific audiences they want to reach. In many other media, advertisers reach an audience that is broader than the segments they prefer to target. While this can be good too, most advertisers do not want to spend money reaching lower-probability targets. Being able to send ads to only those that are most likely to want the product is very attractive to advertisers that know their target audience.

Effective measurement tools

There are many tools readily available to measure the marketing impact of Facebook. A free tool from Facebook, called Facebook Insights, enables you to measure engagement and social return on investment. Google Analytics provides information on the business you generate from Facebook ads.

Better results

Using the measurement tools available, those that have measured the effectiveness of their promotion channels have found that Facebook provides a better return on their investment than many other alternatives. Marketing Sherpa and many other sources have independent case studies that show the kind of results advertisers can achieve on Facebook.

Scratched the surface

Since Facebook has only scratched the surface on monetizing its huge, highly-engaged audience, it appears that it will continue to deliver the results that marketers want from their advertising. If it does, the company stock is likely to continue to experience healthy increases. As of this writing, Facebook's price/earnings ratio is 110.53. While some may consider this to be high, it is with reason for a fast growing, highly-regarded and tech company. To put it in perspective, Amazon has a P/E ratio of 939.33 and Linked In's P/E ratio is 774.89.

Bright future

After a rocky start 3.5 years ago, it appears that Facebook and its stock are on a growth trajectory that is likely to excite its constituents for quite some time. At the very least, it will be interesting to follow the path Facebook takes as it competes to stay on top of the social media world.

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