Some of Facebook's ad weakness can be attributed to declining demand in emerging markets. It is something that bears watching, particularly since it is the company's first reported decline. However, there were also some red flags in profitability. For instance, not only did gross margins eased a bit on a year-over-year basis, GAAP operating income declined 5%.
Granted, Facebook is still a young company and profitability issues are not considered material at this point -- I get that. But good cost management goes a long way. It's not as if Facebook started with a clean slate here. The company is still trying to restore respect and trust. There's no better way to earn "Street cred" than with solid books.
All of that said, Facebook has made some meaningful improvements. However, the company is not out of the woods yet -- and it knows that. Facebook understands it needs additional streams of revenue. Sponsored stories is one example, as are new advertisement formats. There is Graph Search, which has garnered plenty of attention.
The company is looking to combine its marketing database with Internet search and Boom! -- cash starts spitting out. Well, not quite, or at least not yet. It is not yet certain how effective this new feature will be. In time, Facebook will be able to figure it out. It is encouraging, nonetheless, that the company is looking for ways to increase value.
Investors shouldn't discount Facebook's ability to enter the corporate enterprise, a potential gold mine for the company and investors. For example, if Facebook is able to adopt the enterprise benefits of Microsoft's Yammer by allowing employees to chat, share information and contact each other via private directories, Facebook's new corporate presence would then immediately rival that of LinkedIn (LNKD). What's more, with the adoption of Facebook into Apple's (AAPL) mobile IOS as well as other investments made by Microsoft there are powerful allies in Facebook's corner. With one billion users now on hand, Facebook will have plenty of ways to make money. In the meantime, its growth trajectory puts its fair value at $40. At the time of publication the author had a position in AAPL. Follow @rsaintvilus This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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