Two reasons Facebook is turning it aroundOctober 24, 2012: 7:21 AM ET
Spectacular mobile and ad growth is pulling the company out of the doll-drums.
FORTUNE -- Did Facebook go public at the worst possible time? Buyers and sellers in the IPO will answer that question differently, of course. But there's little doubt that Facebook went public when uncertainty about its business prospects was near its peak.
Tech investors typically bet on growth and this Spring, Facebook's (FB) growth rate was falling off a cliff. In just three-quarters leading to the May 18 offering, sales growth had dropped from more than 100% year over year, to less than 40%. Mobile revenue was virtually non-existent.
Now Facebook seems to be turning a corner. Revenue growth is not back to where it was -- it likely never will be -- but it is no longer plummeting. And mobile revenue went from zero to a remarkable 14% of total, a feat that some analysts described as "extraordinary."
Indeed, Facebook's vital signs suggest the patient has stabilized. On Tuesday, the company reported sales of $1.26 billion in the third quarter, up 32% from a year earlier. That's the same growth rate as in the previous quarter. More encouragingly, advertising revenue rose 36%, and excluding the impact of declining foreign currencies, it would have increased by 43%. Not bad. Shares were up 13% in after hours trading.
So what happened? Facebook's disastrous IPO was obviously a wake up call. After proudly declaring to prospective investors that revenue would take a backseat to product, Zuckerberg appears to have changed his tune. He has worked overtime to rally his troops to the cause of monetization. In a notable change, the advertising experience, once an afterthought, was turned into a key responsibility for every product group. The company rolled out several new ad products, and pushed into e-commerce with Gifts, a service that allows user to buy items for each other on the Facebook platform.
"It's clear that Facebook's management team views a strong stock as a strategic priority," says Jordan Rohan, an analyst with Stifel Nicolaus. "Many of the idealistic beliefs of yesteryear are changing."
The changes are beginning to translate into better results, and on Tuesday, Zuckerberg sought to capitalize on those gains. During a conference call with analysts, he tried to persuade investors that their fears about the shift to mobile are misplaced. He called the "mobile opportunity" one of the "most misunderstood aspects" of Facebook's business.
On mobile devices, Zuckerberg said, "we can reach more users, those users visit Facebook more often, and I think we will make more money." His top lieutenant, COO Sheryl Sandberg, hammered the point. "We have become one of the largest mobile advertising platforms in less than 8 months," she said.
Mobile revenue is now coming in at an annualized rate of $600 million. Said Rohan: "Facebook's revenue from mobile is quite impressive."
To be sure, Facebook is not out of the woods. Even with Tuesday's after market rally, shares remain more than 40% below their offering price of $38. They're likely to come under additional pressure in November and December as lockups that prevent some employees and early shareholders from selling expire. Some analysts worry that Facebook's push to monetize its service more aggressively could turn off some users. Many advertisers still question the effectiveness of Facebook. And Facebook's single biggest source of revenue, Zynga (ZYNGA), appears to be crumbling, though Zuckerberg said other gaming companies were doing just fine.
In just five months since its IPO, Facebook has come a long way. Its aura of invincibility faded quickly, forcing Zuck & Co to go back to basics. Now the task of building a business to match the strength of Facebook's phenomenally successful service appears to be underway in earnest. That's all good. But Facebook will likely have to deliver many more quarters of steady improvement before it regains its luster on Wall Street and in Silicon Valley.