Saturday, July 28, 2012

FB nosedive?

Is FB poised to fall? An interesting account of FB and Zynga, and perhaps a harsh speculation. Will it come true? What do you think?


Mark Zuckerberg, Founder & CEO of Facebook

July 26 was not a good day for the Facebook (FB) industrial complex. After all, Zynga (ZNGA), that gets 93% of its revenues from Facebook users buying FarmVille tractors and other digital goods, lost 37% of its value.

And Facebook stock — that traded at $29.34 when it opened Thursday, is poised to start today at $23.91 — 19% below where it was before Zynga announced its results and 44% below its high of $43. It matched revenue and adjusted EPS expectations but did not offer a reason for investors to believe its growth would accelerate.

My conclusion: Facebook is worth $7 a share — so if you can borrow its shares and sell them short, there is still time to make a hefty profit. Here are six reasons why:
Competing objectives. The biggest problem Facebook faces is confusion about what it wants to be when it grows up.

At the moment, growth in the number of users and the time they spend on the site trumps making money. But if Facebook tries to advertise, it risks losing those users.

An informal survey I did with about 80 Babson College juniors and seniors found that almost all of them do not want to see advertising on Facebook. Moreover, many of these students told me that if Facebook increases advertising, they will stop using it.

Slowing growth. Facebook is simply not growing fast enough to justify its lofty valuation. At 955 million, it reported that its monthly active users grew 29% from a year earlier — a mere 6% from the previous quarter.

But its headcount during the quarter was up 50% to 4,000. To justify a premium stock market valuation, Facebook must accelerate, not slow, its growth.

Conflicted ownership structure. CEO Mark Zuckerberg controls 58% of the voting shares so he has a job for life. That means he won’t have to worry about nasty things like activist shareholders — in the mold of Dan Loeb who famously figured out a way to oust Yahoo (YHOO) CEO Scott Thompson and replace him with Marissa Mayer. More generally, this means that Zuckerberg can ignore the interests of public shareholders with impunity.

Weak monetization of online and mobile traffic. Facebook has lost advertisers – General Motors (GM) pulled its Facebook ads in May — because companies don’t feel that they’re getting value. But Facebook is fighting back. For example, it crafted an advertising strategy for Samsung Mobile USA that reached 65 million people with targeted ads who were “twice as likely to engage.” And Samsung USA told FT, that the price was “you’d be surprised how much it isn’t.”

Nevertheless, while mobile ads generate click-throughs at 15.4 times the rate of desktop ones — 1.32% compared to .086% for non-mobile ads, according to AdParlor – Facebook charges 30% lower prices for them. With user growth slowing and ad rates falling as users go mobile — it added 110 million mobile users in six months – Facebook’s revenue growth depends on boosting those mobile advertising rates.

Lack of user privacy. Many Facebook users are growing up — and starting to think about getting their first job. So their inability to shield Facebook photos that could scare off potential employers could cause more suffering than pleasure. To wit, 20% of applications “disqualify themselves from an interview because of content in the social media sphere,” according to the DailyMail.

Given how difficult it is for people to protect Facebook information they hope is private and the huge barriers Facebook uses to keep people from erasing their Facebook footprints, the career risk of being on Facebook could be another impediment to its growth.

Over-valued shares. Facebook is way overvalued. Its forward P/E is 70 and its earnings are forecast to grow a mere 14% in 2013 – yielding a Price/Earnings to Growth (PEG) ratio of 5.0. By my reckoning, Facebook stock would be fairly valued at a PEG of 1.0 — this would yield a price of $7.14 (the 14% earnings growth rate times its 51 cents a share expected earnings).

If you could borrow Facebook shares at $23 and sell them short, I would not be shocked if some time in the next year you could cover your stock loan at $7 — yielding a nice 229% profit. Sure this is risky — Facebook could deliver a surprising surge in revenue and profit growth that would cause the stock to pop.

But regardless of what happens, Zuckerberg will still be Facebook’s billionaire CEO. Although if Facebook stock drops to $7, he will only be a billionaire 3.7 times over instead of his current 12.8.


No comments:

Post a Comment