Facebook: Trading the Yo-Yo
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After a reasonably promising bounce from a 52-week low of $17.55 to over $23, Facebook (NASDAQ: FB) shed 9% during Monday’s session, disappointing investors who had bet on an orderly turnaround for the beleaguered stock.
The catalyst for the selloff may have been an article in Barron’s or may have been the realization by the market that an additional one billion shares will come off lockup next month, but the real question is what to do now. Ultimately, while the long-term prospects for Facebook remain strong, the near and intermediate-term outlooks remain mixed. The stock is an interesting speculative play, but not one that should be a core holding yet.
The Article that Harpooned Facebook?
While a single article is not usually significant enough to move a stock, over the weekend, Barron’s ran an article suggesting that Facebook might only be worth $15 per share. The piece rightly points out that at a $23 stock price, shares are trading at 47 times projected 2012 earnings and 36 times projected 2013. Both Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) are trading at approximately 16 times projected 2012 earnings. Using the $15 suggested fair value, the stock would be at 24 times earnings; this equates to 6 times the company’s projected 2013 revenue.
One of the catalysts for the run up was a public statement by Mark Zuckerberg in which he painted an improving picture for the company’s Facebook Exchange. This is at odds with the Barron’s article that questions Facebook’s ability to shift to the mobile traffic market. At present, the bulk of the company’s revenue is derived from PC users, but over half of Facebook users now access the site from mobile devices like smartphones and tablets. If Facebook wants to achieve growth and real profitability, it must monetize these mobile users. It is worth noting, as the author points out, that Barron’s is one of the few negative opinions in circulation on the stock.
Another potential problem facing the stock is the fact that one billion shares will come out of restricted lock up status in a two-week window next month. Since the stock’s IPO, every respective lock-up expiration has been a catalyst for significant selling and downward pressure on the stock. While there is no reason to believe that those individuals holding the now-restricted shares wish to unload them as soon as it becomes an option, the past behavior of the stock should not be ignored. This is not a new development, but when viewed in conjunction with the Barron’s article, the picture painted of the stock is not particularly positive.
A Closer Look at Mobile
One of the biggest challenges facing Facebook, and all advertisers in the mobile space, is the nature of browsing on a mobile device. Unlike when one is using a PC, the screen real estate available for ad placement is limited on small screens. Additionally, many sites have versions that are optimized for mobile that further limit ad placement. Not only does this impact advertisers, it gives increased control to Apple and Google through their respective control of the bulk of apps available. Each of these factors is having a dramatic impact on the nature of online advertising. If Facebook wishes to compete in the space, a critical source of revenue, it must find a way to adapt to the increasing focus on mobile.
Where Facebook may be able to secure an important lead is in its ability to help advertisers target the recipients of those ads. With new developments like digital wallets where users opt-in to receiving ads, Facebook’s extensive knowledge of its users could prove invaluable to advertisers. While some of these products have gone live, most are in their infancy. This is a significant growth area for many, but is a longer-term source of growth.
Given the yo-yo price action of Facebook over the last weeks and months, the stock is too volatile for most core portfolios. The company will likely solve its monetization problem in the long-run, meaning that holding a small block of shares with a multi-year outlook is acceptable, but the path to that eventuality could be rough. It is too soon to own Facebook as a core holding.
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Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, 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. If you have questions about this post or the Fool’s blog network, click here for information.