Facebook warns of app threat to profits

Just one week before Facebook floats on the stock exchange it has taken the unusual step of releasing bad news to the market. It said that the proportion of users accessing Facebook on their smartphone and tablet has shot up, and taken it by surprise. The relatively undeveloped advertising proposition on these gadgets is expected to mean advertising revenues are not going to be as high as expected.

So why has Facebook released this information, and what will it mean?

Surprise

Facebook said in a statement: "We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users increasing more rapidly than the increase in the number of ads delivered."

It continued: "If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetisation strategies for our mobile users, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected."

Essentially it makes 85% of all its money from adverts on its main website, and has only just started taking steps to try to insert advertising into its offering for mobile hones and tablets.

So what does it mean for the IPO

This information had to be released. It was part of the official filings to Wall Street. It will naturally concern investors, who will read into this that profits targets are highly likely to be missed immediately after the business floats.

They are already going to be concerned by yesterday's news that Facebook's purchase of Instagram (the online photo sharing tool) will not be a smooth process because regulators in the US have insisted that they be allowed to investigate the competition implications.

Facebook has attempted to take the sting out of this bad news by announcing a new strategy. It apparently has plans for a global App Centre, to help users find apps and games on Facebook - including its first store where they can be bought and downloaded. It hopes this will bring in revenue from the mobile market.

Investors

However, investors are nervous. A Bloomberg Global Poll of 1,253 investors, analysts and traders found that 79% didn't think the company deserved valuation at $96 billion - the high end of its projected range. They have also reported that demand from institutional investors has been weaker than expected.

The IPO was already a demanding one. Chief Executive Mark Zuckerberg has said he wants to raise up to $11.8 billion through the launch, which would make it the biggest ever IPO for an internet company.

Yet there is little doubt that there will be enough interest from investors. If the institutional buyers fall through, there is plenty of demand from retail investors to get it over the hurdle. Brokers in the US are already warning their clients that even if they register their interest and desire to buy shares, there may not be enough to go around.

The question is that given the fact that the experts are nervous, and given the timing of this bad news, is a retail investment all that wise?

What do you think? Let us know in the comments.