Facebook: Is it a value play yet?

By Cory Jez - August 31, 2012 | Tickers: AAPL, FB, MSFT | 0 Comments

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It has been one of the most highly publicized IPO’s of my short lifetime, but so far the IPO of social media giant Facebook (NASDAQ: FB) has been anything but exciting for investors.  One might initially describe it as a roller coaster ride – with all the media coverage and exposure over the past months – but unfortunately even roller coasters come back up after they go down.  As of this morning, Facebook was trading just above $19/share, down 50% relative to its IPO price of $38.  So the question then becomes, does Facebook become a value play, and if so, when? 

Let’s look at the numbers first.  As stated, Facebook costs almost half of what it did on May 18.  Ceteris Paribus, this would be a good first indicator for a value play.  However, once we get beyond the low price point, things begin to look a lot shakier.  Facebook’s current price to earnings ratio (P/E) is 45.10 (according to fool.com) compared to an industry-wide average of 22.  Compare this with tech giants Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) with ratios of 15.59 and 15.28 respectively.  In and of itself, the incredibly high P/E should come with a giant red siren to investors looking into Facebook.

 Let’s continue the comparison to Apple and Microsoft, as they are the benchmarks for success in the tech industry.  What do these two companies do?  Well they do a lot of things, but their revenue streams are a lot more straightforward than that of Facebook.  Facebook’s revenue stream is much less diversified, deriving the majority of its revenue from advertising and Zynga.  And most of the discussion over the past 6 months has been that Facebook’s advertising just doesn’t work.   As one fool previously wrote, “If the ad-targeters knew what they were doing, they'd be putting pictures of Burnett's Gin and Game of Thrones all over my homepage.” The fine folks at Reuters tend to agree.

Overall market sentiment is not good for Facebook right now, plain and simple.  On one side of the ball you have analysts apologizing for how badly they missed the mark on Zynga earnings, and on the other side you have Peter Thiel pulling out over 20 million shares of Facebook stock.  An SEC filing shows that Thiel sold about 20 million shares on August 16^th, at the end of the first “lockup period” for some of Facebook’s earlier investors.  Yes, these things are bad, but I think that it is going to get worse.  You have another lockup period expiring in November, with over 1 billion shares eligible to hit the market.  If they do, expect the stock to perform as it did on Thursday (down roughly 6% when the NASDAQ rose 1%).

In 2011, 85% of Facebook’s revenue was derived from advertising revenue (Zynga accounted for the other 15%).  In my opinion, this, paired with the increasing mobilization of Facebook could spell disaster.  Facebook is seeing a growth in mobile users, while desktop users are flat (down in the US), and over 100 million users are mobile only.  Facebook said it best in their 10Q filing for Q2 2012: “If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected.”

So there you have it boys and girls, the good (not much of it), the bad, and the ugly.  Is Facebook a buy now? NO.  Could it be one day? Maybe.  What would I have to see for that to happen?  A number of factors would have to change.  The PE would need to come out of the stratosphere, I would need to see a tangible revenue stream (no Facebook, don’t buy RIMM), and I’d like to not see everyone jumping ship left and right.  Oh and don’t forget that I probably wouldn’t even consider it without a price point in the low-mid teens. 

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