Is Facebook Failing Advertisers?

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Is Facebook failing advertisers? That's the claim made by research firm Forrester Research in a damning report, according to which marketers believe the social network provides the least value of any digital marketing channel. If Forrester's findings are representative, they raise some uncomfortable questions regarding the potential growth and long-term profitability of Facebook's advertising-driven business model at a time when the stock's valuation -- at 60 times the next 12 months' earnings-per-share estimate -- leave little room for any such doubts.

The stock chart suggests all is well
Facebook's stock has been on a huge run since it released its second-quarter results on July 24, vaulting above the $45 high it achieved on its first day of trading and helping to erase the negative sentiment that resulted from a botched IPO and disastrous post-flotation performance:

FB Chart

FB data by YCharts

The second-quarter results convinced investors that Facebook had successfully managed the transition to mobile advertising; uncertainty concerning the company's ability to do so first surfaced just days before the IPO and had continued to dog the company.

Has Facebook abandoned social marketing?
However, Forrester's report suggests that Facebook still has some big strides to make -- whether on mobile devices or elsewhere -- if it is to fulfill the promise of its extraordinary reach and the depth of the knowledge it has about its users. Forrester's thesis is that Facebook is wasting these enormous assets and has effectively given up on social marketing per se, to wit:

Everyone who clicks the like button on a brand's Facebook page volunteers to receive that brand's messages -- but on average, Facebook only shows each brand's posts to 16% of its fans. And while Facebook upgrades its paid advertising tools and offerings monthly or more, it's done little in the past 18 months to improve its unloved branded page format or the tools that marketers use to manage and measure those pages.

Instead, it has relegated itself to being just a massive display-ad platform. Unfortunately, as the following graph illustrates, marketers report that Facebook's display ads deliver less value than those on other websites:

Forrester provides some recommendations for Facebook to reverse course, but it isn't hopeful the company will implement them:

We don't believe that Facebook will make the changes needed to win back marketers' hearts. In fact, we don't believe the company even sees the need to change: Its enormous revenues have blinded it to marketers' growing dissatisfaction. But if it doesn't change, the results will be dire.

Facebook leaves the door open for its competitors
Facebook simply can't afford that kind of attitude; its inertia creates an enormous gap in the marketplace that other sites, including Google, LinkedIn, and Twitter, ought to be more than happy to fill. Although, to be fair, these competitors also need to raise their game: Note that Twitter scored barely higher than Facebook on the preceding question.

In fact, the Forrester report illustrates that the concept and practice of social marketing remains immature, even experimental, to a large extent. In fact, earlier this month, the Financial Times related that several executives at major advertising agencies say the spend they allocate to Twitter comes largely from "experimental budgets," suggesting that the website has yet to establish itself as a key advertising channel.

Forrester's report is a strident reminder that all is not won for Facebook, despite a valuation that suggests the market believes otherwise. The recent surge in stock price has reinforced investors' degree of confidence regarding the company's business prospects, but that may be unwarranted; at the very least, Forrester presents a contrarian perspective that is useful to consider. The need for some skepticism in an overheated environment for social-networking shares applies doubly to prospective investors in Twitter, which has yet to turn a profit.

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Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends and owns shares of, Apple, Facebook, Google, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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