Still Too Pricey
online.barrons.com
online.barrons.com
I like how some firms decide to throw in P/E comparisons to Apple and Google (Two seasoned juggernaut companies.) . Yet LinkedIn is also a social network, has an absurd P/E ratio over 100, but that's okay.
"Anyone who owns Facebook should be exceptionally troubled that they're still trying to 'figure out' mobile monetization and had to lay out $1 billion for Instagram because some start-up had figured out mobile pictures better than Facebook," says one institutional investor.
These are what the experts have to say? He hardly sounds like an expert to me. Tell me a company who excels at mobile monetization.
I wonder if Wallstreet fully grasps what Facebook is all about and how it fits into the grand scheme of things. Perhaps looking at traditional markers for evaluating a company like Facebook isn't working?
They fail to realize that Facebook is the most traffic'd website in the world. (According to Alexa: http://www.alexa.com/topsites).
Somehow $15 doesn't sound right.
Judging share prices by whether they "sound right" is not good investment advice.
Too young to remember the dotcom boom? If I gave everyone in the world a $1 every time they visited my site I could also have the most traffic'd site in the world, but that wouldn't make my site worth any money.
Of course FB isn't like that, but the point is that traffic is worthless until you can monetize it. IMHO, their biggest problem is monetizing their users without running them away.
If I gave everyone in the world a $1 every time they visited my site I could also have the most traffic'd site in the world
Perhaps, but your site would probably not have the marketing treasure-trove that FB has. FB needs to learn how to use it.
Sorry to quibble, but no you couldn't. If you had 7B dollars and you literally made this offer to every person in the world, you still would not get Facebook's traffic.
And in any case, Facebook has a lot more than traffic. Just because their monetization is lackluster so far doesn't mean they don't have a ton of interesting directions to go in. All this hand-wringing and analysts attempting to project a realistic valuation for Facebook is just anguish and sour grapes over being hoodwinked by the hype generated by a bunch of greedy investment bankers.
However if you take all the IPO hoopla out of the equation, and you see that Facebook is still growing, still evolving, and has a lot of unique assets that could propel in the company in new directions. I wouldn't bet against Facebook just because some cranky financial experts want me to believe they know where Facebook is headed. They don't know. Nobody knows.
I'm pretty sure you would. It's a dollar every time they visit the site, not one dollar per person.
The last two sentences are precisely why analysts are "cranky" and institutional ownership of this stock is so faint.
A reasonable investor makes an investment decision based on the info they have and the prospect of discounted future cash flows. At this point it is clear not even Facebook management really knows where they're headed. Just where the money is. How does a reasonable investor value that? I wouldn't bet on facebook at any price just because they have critical mass on a free social network today.
Edit: What I meant by the last statement was that valuation matters. Obviously there is a price at which Facebook stock is fair or even undervalued.
I think I'm with Wall Street.
Why is mobile monetization so difficult? Seems like a company that can monetize the desktop experience can do mobile too. They're both computers on which users consume information. If ads work on the desktop then I can't see a reason why they won't work on mobile.
From the article: The paradigm shift to the app model is unequivocally bad for Facebook, [...] Facebook is designed to be open all the time, to be visited in the gaps of the day or as a platform in its own right, bridging to a variety of activities related to the social network. [...] Why use Facebook to play a game, read an article, manage your photos, stream music, or shop, [...] when you can select a specialized app directly.
Think real hard about why it bothers you when a stranger says negative things about fb. Be careful about closing yourself off to those who take opposing positions. Egos will want to remain consistent with past choices, but the world evolves and changes constantly.
Shut off the ego and shut off the emotions. Listen to others opinions then go and do what you feel is right. Opinions are water under the bridge.
You shouldn't be tiring of any opinions if you are a serious investor. Many analysts have fb pegged at near $15. If they are all wrong, then you don't have to try to convince others that everyone is wrong, just go into the market and buy as much stock as possible and just wait for the efficiency of the market to catch up. FREE MONEY...if you're right :)
As a geek , I fully grasp Facebook's 12.24 pages/visit stat. Even Reddit is just a hair below, at 10.6. (source: Alexa). That type of engagement is insanely hard to get for a site as big as Facebook. Investors do not look at these things because they do not understand what they mean. They look at traditional investor metrics.
If Facebook included ONE banner ad across the top of their pages, their revenue would soar. They are choosing their own path and are paying the price for it right now. Time will tell if their method will work out.
What I do know is that investors are a finicky bunch. When Zuck spoke at Disrupt 2 weeks ago investors decided to buy Facebook and it rose 4 dollars since then. The reality is nothing had changed, but in their eyes it just looked better. Fair enough, that is how the game is played.
If an investment firms evaluates traditional companies like Borders, Best Buy, or Radioshack then I would not even question their expertise. They are a very knowledgeable bunch when it comes to traditional companies.
However I do not believe their analysis of the tech companies that exist on the internet is as accurate, simply because they do not fully understand the industry and web.
Institutional ownership is a vote of confidence for the long haul. Mutual funds and pension funds buy long and cannot participate in short selling.
Big money knows something about fb long term prospects that all of us don't. I don't know what that is but their actions speak louder than anybody's opinions can.
(FWIW, I wouldn't touch FB right now, either. There are a couple of high risk issues I think they have to deal with, and I'm not sure they will come through unscathed.)
I will agree that Google and Apple aren't the right companies to compare FB with. But FB is having mobile problems, and Apple and Google do seem to have reasonable mobile strategies, so I can understand why analysts do that.
I think they grasp it. The reality is when it comes to financial matters, engagement isn't the only (or even most important) metric. In fact, it doesn't matter squat if you can't monetize it. And that's exactly the stumbling block FB has run into.
You can retort engagement is important because it's a sign of a happy user & monetization shouldn't matter. Which is fine, but then the stock price shouldn't matter either.
Let me give you a tip: Professional investors absolutely understand the value of pageveiws and engagement and all that fun stuff. It's why facebook was able to basically name their multiple with the IPO underwriters and it was the biggest offering in history.
However, when the rubber meets the road, it is simply not the most important metric nor is it any guarantee of long-term future profits (forget about current profitability for the sake of argument.)
Is a TV channel with the highest ratings automatically the best investment? What if their costs are insane? What if they're about to lose some great shows or the popularity of them is waning. Hey, it's the most popular station, so it has to be worth the most, right?? To say otherwise isn't an issue of not "getting it," it's a matter of understanding that business is business whether we're talking websites, widgets, or retail.
Traders (as opposed to investors) are besides themselves with annoyance at the way the market is treating Facebook. If you bought at 18 and sold at 22 you made 22% on your investment in about a month. (annualized at 264%, woohoo :-) And yet if you're a trader there aren't any signals or technical stats or any of their other tools that they use to tell you to do this.
I've observed when this happens people lash out and tell the people who bought at 18 they were insane, and that it went to 22 was a fluke of chance, and that FB is crazy. Etc etc.
Except that there is a lot of randomness in the world, and in trading, and as folks have pointed out here repeatedly it is unpredictable by its very nature.
So while FB gyrates it will infuriate the traders, they want consistent rise, or consistent fall, or rise to peak followed by slow fall to minimum. Too bad.
Apple is very good at this in the traditional sense. Google has found a way to sell people who are looking for something to people who are selling that thing.
Facebook? The jury is out. They can capture a lot of attention. Right now, the easiest businesses to compare FB to are TV networks. Unfortunately, people don't really like being interrupted by a few-minute-long commercial break on the internet.
Where is Facebook in 5 years. Either they figure something out, and are huge, they find a small niche profit source, or they go the way of AOL circa Y2k. How you rate the likeliness of these outcomes determines how you should price the stock.
Said back on 19th May (the day after FB's IPO):
"asset managers [do is] look at Free Cash Flow to Equity, not Net Income. On a FCF to Equity valuation, FB IPOed at +220x. Even at a generous P/E or FCF/E ratio of 25x, Facebook's Free Cash Flow needs to go from $450m to $4,000m in the next 24-36 months. Do you think that is possible? After looking at their infrastructure needs I think not." http://news.ycombinator.com/item?id=4002988
My guess is that his "knowledge" is worth more as an article that he got paid $25 for writing than it is in actual practice.
Second of all, being right in opinion about market is the best damn PR you can imagine. After all, its all about profits. If you "guessed" market good enough in the past, you more likely attract rich investors going forward.
So as much as this guy can short the stock for $5MM himself and keep his mouth shut, it is much smarter to short it for the same amount, wait for others to join helping his position to grow, and if hes right on his bet, attract investors with $50MM in the future.
Even if you are 100% correct (an impossibility) that a stock ought to be valued at a certain price, there is no guarantee that you can place your orders at the right time in order to make a profit on it minus transaction costs.
There's a common saying that goes loosely: 'the market can stay irrational longer than you can stay solvent'.
So given that likelihood, its not surprising that some choose to take a guaranteed payday by writing an article, instead of going forth and rolling the dice.
Couldn't the same be said for anyone giving financial advice.
(Note, this isn't necessarily a defense of those who do. :)
So the better question is this: why do any of the professional journalists covering finance and capital markets do it when they could be participants instead? Maybe they like reporting more. It's kind of like asking why aren't all astronomers astronauts?
This recent rally is akin to a dead cat bounce. Nothing in the market goes straight up or straight down. We'll be seeing sub-$15 soon.. Consider it a x-mas present.
Actually while we're on the topic.. the Dow is getting close to 14,000 again; our high from 2008. Don't be surprised to see a double top on the markets and then a sharp retrace afterward.
http://techcrunch.com/2012/09/18/facebook-mobile-ad-network/
The Fed is pumping money into the system, and has said they're going to do it indefinitely. The stock market is going up (at least in nominal terms).
At least, that's where my money is.
Technical Analysis is your only friend.
Or to put it another way; if the fed is pumping money into the market it only makes it easier for others to exit.
20% of people invest in stocks, and these people control almost 50% of wealth in America. A major goal of QE is to pump the market up to generate a wealth effect for these people, and (hopefully) pull the economy up with it. You can see that this happened by checking out the SPY chart from Nov. 2008 (QE1) onward.
As the other commenter noted, don't fight the Fed. Contrary to what you read in the popular media, they know what they are doing. If you hopped on board in '08, you got massive returns the past few years.
See for yourself: http://barrons.wsj.net/public/resources/images/ON-AY643_cove...
Currently their major (only?) customers are companies paying Facebook to place ads in front of people who don't want to see them and may in fact try hard not to see them.
Although ads has worked for radio and television, it seems shaky to me. It reminds me of the early days of television and radio, where shows on TV were largely plays adopted to TV, because that's what people did with the preceding medium, and news programming was an announcer reading the newspaper, because the newspaper was where news came from prior to radio and TV.
Ads worked for the preceding media, but that's no reason not to innovate monetization on the web.
Facebook could, instead or in addition, charge money to its users for access to Facebook. They could sell their mobile app. They could ... well, they're smarter than me, they can do their own innovation. :)
If your uses don't commit to use by spending money, then they're essentially transient, waiting for the next free thing. Make Facebook a service that people don't complain about at every changed policy and implementation, make it so good that people will pay to use it, and I'll be impressed. (Not to take away at all from the accomplishment so far.)
If Facebook was smart enough to think of effective new ways to make money that we haven't thought of, they'd be doing them now.
http://people.stern.nyu.edu/adamodar/New_Home_Page/webcasteq...
http://aswathdamodaran.blogspot.com/2012/08/facebook-face-pl...