Does Facebook Need a New CEO?


Facebook (NAS: FB) reported earnings for the first time as a public company last week, and the results were mixed. Revenue was up 32%, which exceeded analysts' forecasts. And its adjusted net profit met expectations as well.

Investors were apparently hoping for more, however, and the stock dropped precipitously after the news. Facebook shares are now trading roughly 40% lower than the IPO price of $38 per share.

One commentator has already seen enough. Writing just after the earnings report, John Abell from Reuters wondered if Facebook needs a new CEO.

Zuckerberg isn't a hero
Abell noted the poor performance of the stock since the IPO, and then declared that "Facebook is a stock for the masses" and that the "masses need a hero." According to Abell, Zuckerberg is not that hero, because he's not playing to his strength, which is presumably "product strategy." Abell implies that Zuckerberg is not suited to the day-to-day grind of running a public company, and says he should "get out of the line of fire and retreat to the lab."

A pitiless smackdown
Sarah Lacy, founder and editor-in-chief of PandoDaily, responded mercilessly to Abell's commentary. First, she noted that founder CEOs have had extraordinary success in Silicon Valley, so tampering with that formula would seem very unwise. Just look at the tenures of Larry Page at Google and Steve Jobs with Apple and compare their performance with that of Hewlett-Packard and Yahoo!, which have both struggled in recent years to find effective CEOs who can lead their businesses. Throwing a founder CEO overboard may not be the best strategy, according to Lacy.

She also notes that Zuckerberg is the one who made Facebook what it is today, and that he has built "a site of unprecedented global size in a matter of years." That's what a CEO does, and Lacy feels Zuckerberg has been doing it better than "anyone else of this generation."

Short-term silliness
I think Lacy is absolutely correct in challenging Abell, though she may have been -- as June Cleaver might have said - a bit rough on "the Beaver." Zuckerberg has demonstrated great leadership abilities in building a company that now has more than 950 million users. Marc Andreessen, who sits on Facebook's board, told Charlie Rose recently that Zuckerberg has worked really hard at teaching himself to be CEO. In addition to having built one of the best teams in Silicon Valley, Zuckerberg is a magnet for talent, according to Andreessen. That's something that Steve Jobs was noted for as well.

Abell's desire for a CEO change is a perfect illustration of the market's short-term attitude toward Facebook. Is it really possible to understand Facebook's future based on one quarter's worth of results? One of its most promising initiatives, Sponsored Stories, is just getting started. Is a couple of months enough time for investors to accurately assess its future prospects? Was there anything else from the earnings release and conference call that warranted a 14% haircut in the share price?

Of course not. And when market commentators continuously talk of how investors have "lost money" in Facebook, it completely ignores what might happen in the future for long-term investors of the company.

Zuckerberg clearly understands this. On the conference call, he admitted that he was disappointed in the performance of the stock so far. But then he added:

I think the important thing for us is to stay focused on the fact that we are the same company now that we were before. We've got the same opportunity in front of us to build something really important and valuable over time, and if we stay focused on building great products, we expect and we want to be judged based on the quality of the experiences we build, and the value we can create over the long term.

That last point is key to me. The market right now is obsessed with judging Facebook over a short-term time frame, while the company is focused on creating long-term value. For those investors who can drown out the noise, Facebook could be a very compelling long-term investment opportunity. That's why my colleague David Meier and I own shares in our real-money, 10-Bagger portfolio.

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John Reeves owns shares of Apple and Google. You can follow him on Twitter@TenBaggers.The Motley Fool owns shares of Facebook, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Google, Facebook, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.
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