These Persistent Threats Could Fuel Facebook Bears

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The rise in Facebook (NASDAQ: FB) shares since November took a toll on short-sellers. During the past quarter, shares rose nearly 30%. More recently, short-selling volume declined 40% in the last two weeks of November. Open interest short-selling declined from 95.3 million shares, when shares were $22.17, to 56.9 million, when shares were $28.00, from November 15 to November 30, respectively. The short-volume represents 12.1% of float. Facebook closed recently at $26.81.

The ingredients for Facebook to drift below $22.17 were there. Led by an end to the lock-up period, Facebook’s chief and its executives vowed not to sell their shares. Still, after short-selling volumes declined in November, Sheryl Sandberg, Facebook’s COO, sold around 5%, or 950,000 shares, at around $27.70.

Sandberg may have avoided a dollar in losses for the 5% of the shares, but what should investors be doing with shares of Facebook?

To help make this decision, investors should look at the progress for mobile and weight it against developments being made by competition, namely Twitter and Google (NASDAQ: GOOG).

There are two positive developments.

1) Instagram

Facebook disabled the integration of Instagram pictures with Twitter. This is being done to encourage users to use the application, by leaving Twitter’s site to access Instagram images. The application was also updated for Apple’s iOS and Google’s Android apps.

With monetization a priority, Instagram users should soon expect ads to show up. This should generate revenue growth for Facebook, at least in the short-term.

2) Native Facebook App for Android

Facebook finally released a native Facebook app for Android. Facebook re-wrote the app in native code, leaving behind HTML 5. This move should help improve sales in mobile ads.

Analysis

Facebook is clearly thinking of ways for growing on the trend towards mobile growth. In its last quarterly conference call, Facebook said 40% of desktop users were likely to use the site on any given day. On mobile, 70% of the users are likely to use the site. 14% of Facebook’s revenue was from mobile, in the last quarter.

On the flip side, the rate of increase in shares of Facebook is declining. In addition to short-interest declining, Facebook dropped 5% on December 14. If Facebook’s growth strategy in mobile does not play out, shares could move down similar to Zynga (NASDAQ: ZNGA):

 

(Chart Source: Yahoo Finance)

Zynga rallied dozens of times, but it turned out each rally was temporary. Fundamentals deteriorated for Zynga on a regular basis. In the last year, Zynga lost many executives, lost exclusivity for developing apps on Facebook, faced litigation, and shifted its focus on mobile apps and real-money gambling.

Google+ Competition Heats Up

At around the same time a native Facebook app was released for Android, Google launched an update to the Google+ mobile application. 18 impressive new features were added. On Google+, communities were opened, allowing users to join and connect to groups based on interests.  Users may Hangout, plan Events, and take panoramic photos.

Conclusion

Investors renewed their interest in Facebook in recent months. The high valuation is being justified by promises of growth from mobile initiatives that have yet to be played out over the long run. “Promoted Posts” will help generate revenue. Adding advertising in the News Feed on both mobile and desktop will improve user engagement. This could be a double-edged sword, especially when new threats are emerging. MySpace recently began to accept members, and developments in Google+ make both sites viable alternatives for consuming content. If users grow tired of the advertising on Facebook, these new threats could be refreshing for users, but devastating to Facebook’s share price. With the likelihood of competitors succeeding faster than Facebook’s growth initiatives, investors should continue to remain bearish on this company.


chrispycrunch has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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