Facebook Conquers Mobile: Here’s the Downside

If you run an Internet-based company of any sort these days, you’d better make sure people use your site on their smartphones and tablets, not just their PCs. Everyone knows that PC business is dying, and the growth is in mobile. But there’s a catch: if you do this well, the market may punish you for that success.

This Catch 22 was illustrated well when Oppenheimer analyst Jason Helfstein congratulated Facebook (FB) on some stellar mobile numbers in a report earlier this month. Facebook, it appears, has been doing a bang-up job of getting onto smartphones and tablets, where it now racks up more hours than through PCs. Helfstein was impressed. Then he cut his target share price for Facebook, see here in a stock chart, by a dollar to $32.

FB Chart

FB data by YCharts

Internet radio business Pandora Media (P) saw analysts lower their earnings forecasts for the company last month after it reported an unexpectedly strong 111% gain in total mobile ad revenues. Other news helped propel the share price higher anyway, but the bigger portion of sales from mobile is seen as a drag on profits in the immediate future.

The problem with success on mobile devices is that mobile ads are still a lot cheaper than ads sold for people staring at fixed screens in their homes and offices. At Pandora, for example, mobile ad rates are about half the price of others. So profit margins shrink as the percentage of mobile advertising rises. It’s an issue for Internet companies big and small. At Google (GOOG), for example, advertisers pay lower cost-per-click rates when viewers search via smartphones and tablets. And Google use on those devices is rising rapidly. It’s hardly the only reason for Google’s narrowing profit margins – and Google doesn’t break out mobile stats in a helpful way – but this trend surely hasn’t helped.

GOOG Gross Profit Margin TTM Chart

GOOG Gross Profit Margin TTM data by YCharts

So how’s an investor to view this conundrum? Long-term, there’s no doubt that success in mobile business will be crucial for revenue growth at companies that depend on Internet ads. A study published Wednesday by the Interactive Advertising Bureau and PricewaterhouseCoopers showed that Internet advertising spending rose 15% last year, but that spending on mobile ads more than doubled. The report predicted that mobile ad spending would grow 77% in 2013.

So far, the repercussions for investors in companies that have not attracted viewers on mobile devices are far worse than those well in the game, despite the expense. Just ask anyone who bought shares of Baidu (BIDU) early in the mobile revolution. Baidu, the dominant Internet search company in China, has had numerous setbacks in its attempts to carry its desktop popularity over to mobile devices. Its share price is down 40% in the past year largely because of those problems, as seen in a stock chart.

BIDU Chart

BIDU data by YCharts

Prices for mobile ads should rise with demand, making the disadvantages of selling them go away. Google CEO Larry Page told investors that he wasn’t sure they would ever sell for the same amount on mobile devices as on PCs. He also said he wasn’t sure which might be more expensive in the end. But he, along with most everyone else in this business, sees these discrepancies as short-term problems.

By the way, that Oppenheimer analyst who cut his price target for Facebook? He also reiterated his rating on the shares: outperform.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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