Here's Why Facebook's Big Profit Margins Won't Last Long

Facebook employees with guns

Photo: Jim Migdal

Facebook CEO Mark Zuckerberg has made it clear that he is not going to manage his company for Wall Street and its quarterly expectations.Henry Blodget says for short term investors, Zuckerberg’s philosophy amounts to a “three-alarm klaxon: Don’t buy this stock!”

But pleasing Wall Street isn’t the only reason to have a healthy and growing stock price.

There’s also recruiting to consider.

If Zuckerberg wants to hire the best people for his mission-disguised-as-a-company, he’s going to have to pay them.

So far, Facebook has compensated its best people with stock. This has worked because private investors have eagerly bid up the value of Facebook stock.

It sounds like Zuckerberg isn’t overly concerned with keeping that momentum going on public markets.

In this way, he is a lot like Amazon CEO Jeff Bezos, who also made clear to investors that he was going to ignore the company’s short term stock price in favour of building for the long term.

When Bezos hired a president in 1998, he gave him a 20-year stock option. This was unheard-of. But that showed where his focus was.

Zuckerberg will tell employees “if we execute the mission, the stock will eventually be worth a lot more than it is today.”

He’s right, but “eventually” is a long time.

So, to keep up Facebook’s incredible recruiting and retention record, Zuckerberg is probably going to have to start paying out bigger cash salaries. Facebook will likely also be forced to complete more of its “acqui-hires” with cash, rather than stock.

Facebook happens to generate a lot of cash and earnings, so this switch will be feasible.

Of course, all this cash spending will shrink Facebook’s extraordinary profit margin.

That will probably send Wall Street investors scurrying even further in the opposite direction, and just reinforce the paradigm.

This pattern will hold until Facebook figures out a Google-like business model (user-friendly, explosive) and the stock goes bananas OR that business model never comes, all those great employees fail to keep users addicted to Facebook the service, and their salaries become too expensive to maintain. And then? Watch out, below.

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