Zombie Apocalypse Part II, Facebook Feeding Time
Liz is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A couple of weeks ago I took a look at Groupon (NASDAQ: GRPN) because the stock had reached a new low of $7.22 per share (since then share price has slipped even further to $6.35). Some analysts were and still are in favor of buying it. However, based on my Zombie Apocalypse or Epic Buying Opportunity analysis, investing in Groupon is analogus to zombie investing. Zombie investors are those blindly opportunistic souls who ignore the business plan realities and fundamentals of a company and like zombies, lumber ahead and invest anyway. In that post I promised to take a look at Facebook (NASDAQ: FB) and as I write this, FB has fallen to a new low of $19.82/share. With that in mind my vision is getting glazed and my hands are trembling. Has the epic buying opportunity on FB finally arrived? Is it time to feed?
Well, some people think so. This past Tuesday, Bernstein Investment Management and Research initiated FB from NA to a market perform so that's one group plodding ahead. Similarly on Monday, the First Call Consensus report provided by Reuters indicated that among 32 analysts, 53.2% currently rate FB a buy (that's right, zombies travel in groups) while only 6.2% said unfavorable or sell. The specific breakdown was as follows: 18.8% rated it a strong buy, 34.4% a buy, 40% a hold, 3.1% unfavorable and a measly 3.1% said to sell. Such recommendations perplex me, because given the FB model for increasing advertising revenue (is there one?), even at $1.24 profit per user, it still doesn't get us to a money-making valuation of the company in the long-term. Fool Alex Dumortier did a bang-up, focused analysis for reference.
Driving further down the road to that awaiting, broken-down bus of imaginary profits/tourists, I read one article where some staunch FB investors were saying that it was really a 4 to 5 year play, so they felt confident that their present-day investment made sense. A four to five year play? Wow, now is that is blind trust, buoyant optimism, or a catatonically myopic vision? Given the speed at which the Internet evolves and innovations are born, I would say even 5 months away in the social media space is a lifetime! With that being said and a FB price/cash flow of -687.45 and PE of 82.68, could this be a speculative bubble?
When it comes to social media investment opportunities, it doesn't make prudent sense to bet that far out. Yes, I like social-player Twitter, but Twitter gives me news and instant connection (no layers to negotiate like on FB) with very little effort. And with a potential IPO in 2013, they have already gotten to work figuring out their for-profit advertising approach.
Similarly, LinkedIn (NYSE: LNKD) takes me less than five minutes a day (if that long), and I get business contacts and news in a clear-cut, no-nonsense fashion. They also have figured out how to attract advertiser dollars. So while Facebook does have over 955 million users and is focused on user satisfaction and market penetration, what about advertisers? Further, I am not sure if behavior-wise, the trend is for people to spend hours hooked up to their Facebook account. We are all being conditioned to expect things now and to engage instantaneously.
Facebook is "the largest social media website" and maybe that's the problem in a nutshell. As obvious as it is, people go on Facebook to be social, not to be sold! And if you think that you can sell them in a social setting, you better target them both demographically and opportunistically (basically they are already going to buy at some point, you just get to them first). For example, identifying every female user with small children who goes on FB from September through November. Develop a "Facebook Holiday Shopping Extravaganza" and give discounts on products for children, overlay a game or sweepstakes, and then measure the awesome results (if they materialize) to demonstrate how just effective advertising and promotion on Facebook is. Do a profit per user and a cost per user analysis and leverage that.
However boring it may seem, advertisers like GM (which stopped paying for FB advertising), Kraft and P&G spend millions of dollars every year on advertising and promotion. There are marketing managers all over the globe just waiting for that big, new, breakthrough social media vehicle to propel both their brands and their careers onward and upward. These marketers don't care about hype and promises and cutting edge, but rather did it deliver another customer, promote the brand's message, enhance brand equity, outwit the competition, prove cost-effective, and most importantly, bring in another dollar of net revenue? In my mind, that's what Facebook should be focusing on. Or in the words of the character Columbus in the 2009 cult classic Zombieland: "You want to know the best thing about Zombieland? No Facebook status updates."
CoachLizzy has no positions in the stocks listed above. The Motley Fool owns shares of Facebook. Motley Fool newsletter services recommend Facebook. 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. If you have questions about this post or the Fool’s blog network, click here for information.