Investors' Facebook Quandry- Buy or Run Away
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Let's "face" it, you use Facebook (NASDAQ: FB), your friends use Facebook, the whole world uses Facebook and a lot of us are thinking about buying the newly issued stock of this company we are so familiar with. I have had at least 5 friends ask me privately for my opinion, so I'm going to: reply-all.
What’s Facebook’s #1 goal? Grow their already huge base of users, currently at around 900 million. Why? Very simply put, Facebook’s only true competitive advantage, its “moat” if you will, is its ubiquity of use.
The fact that you, and all your bonehead friends use it, is the primary reason people don’t move over to Google Plus (NASDAQ: GOOG), which frankly has a prettier platform and more capabilities. I often equate Facebook to being the sun of the Social Media Galaxy and the more planets (people) it has in its orbit, the greater its gravitational pull becomes, and the more planets it attracts. Zuckerberg clearly understands this, and thus is doing all he can to add to his gravitational mass before attempting to tax his planetary alliance via more intrusive advertising. (You’ll notice how little, if any, advertising Google + has as well.)
The company sits on the world’s largest gold mine- our personal data, which grows daily as we whisper exacting details of what it is we “like” into the sun's ear. It ain’t going to be hard to match us up with a seller, making for super-efficient advertising, which in some weird sense benefits society as my time on Facebook is unlikely to be utterly wasted by being forced to sit through a Depends commercial.
My point is I don’t believe that Facebook currently attempts to maximize revenues because they'd rather realize long term strategic goals, so I’m willing to give them a slight break on their lofty valuation.
That being said, it is being richly valued. At 104 billion, and 85 times current earnings, baked into the cake is the assumption that Facebook will grow, and grow big time. These aren’t small numbers we are dealing with, Facebook has a higher market value than Kraft Foods and Disney, which have real physical world assets on their balance sheet, strong brands, and earn far more.
So where is Facebook’s growth going to come from? Well, as I mentioned, their first step is to continue growing their user base- all the hype from the IPO had to help, that was some damn good marketing. While Facebook builds up to whatever they consider to be critical mass, they’ll be tinkering with the advertisements we are seeing, refining display, etc. They’ll also have to be doing a lot with their mobile offerings, which currently earns next to zero el grande for the company. Whether the company will be successful here is huge, because we are becoming less and less PC-centric. Me, I'll bet their successful, but there's still a chance they'll fail in this regard.
But here is what I find scary as a Google investor, and why the company is putting so much of its resources behind Google +; Facebook is likely to change the face of the modern search engine, incorporating algorithms using our “likes,” location, and who we know. Google isn’t sitting idly by and watching, and are trying to beat Facebook to the punch via Plus. Especially scary, and interesting, is whether or not Microsoft in effort to distract Google from their continuing successful attacks on their core products (Windows and Office) “Bings them,” which I wrote an entire piece on. This in my opinion would be a win-win for both companies and a loss for Google. I can pretty much assure you the Facebook search engine is coming, the only question is when, and whether you might start searching the web via Facebook when you're there instead Googling.
People make jokes about Google Plus being a ghost town, but even being late to the game, they are Facebook’s primary competition, and are pouring massive amounts of resources into building their network, and frankly, have some excellent features, which for some reason Facebook hasn’t countered- specifically the new addition of Google’s Live Hangouts where you can broadcast yourself, your theatre play, concert, Little League baseball game live to the world, which is HUGE, and just an example of how we all benefit from the competition of a capitalist system (Not going “Back In The USSR.”) The ability to broadcast your program via live- I repeat live TV for the masses is simply an incredible feat.
The truth is at this point in time, Google, and to a lesser degree twitter and Pinterest, is all that lies between Facebook and total domination of the social media world.
Does this mean that a future network might not displace them, that at some point Facebook will simply become pasee? While possible, I don’t see it happening- it’s simply too useful a tool, “Facebook me,”while not as ubiquitous as “Google it,” has certainly become part of our language.
Then again, MySpace five years ago was way ahead of Facebook, but destroyed their business via greedy attempts to over-monetize the site, creating a bad user experience, and we all fled to Facebook, which knew its purpose, kept things simple, and took a long term view of a customer's worth.
Aside of, in a year, not countering Google Hangouts, which I find mystifying, only incorporating Skype for 1 on 1 chat, Facebook, at present shows no signs only of slowing down, or losing hold of their users. I know so many people who say they are sick of FB, and won't be using it again, and a few days later, are back posting their inane thoughts ...
The Challenge of One
One person runs Facebook- Zuckerberg, who like the founders of Google, set it up so that he retains over 50% of the company’s voting rights. It's his fiefdom.
I give him tremendous credit for having guided them this far, but he’s not infallible. There's a video during the Face Book Roadshow of Mark responding to the question of when Facebook would create an app for the iPad.
Zuckerberg answers that the iPad is not mobile, ie- not a cell phone, essentially that it’s an extension of a desktop PC. Would Apple Computer agree, as the questioner points out? Likely not. It’s only one misstatement, but built into the astronomically high price is the supposition that Facebook will fire on all cylinders, that it won’t make any costly mistakes, If you bet on Facebook, you are betting on him at lofty valuations.
And speaking of lofty valuations, Zuckerberg bought Instagram for one billion dollars. A bill for a cell phone app which enables you to alter the photos you take with your phone by adding filtered layers that imitate the look of low-end film cameras. I have used Instgram, it’s okay, I might use it again, but one Billion? For a free, low end version of photo shop for your phone. One billion?? Dr. Evil would be proud.
I don’t care how fast the app was growing, how much traction you might have, I believe paying a billion dollars for a company with ZERO revenue is unjustifiable. Maybe I’m just turning into an old fuddy-duddy Warren Buffet (could be worse, right?), or maybe I just remember the .com crash of 2001 all too well.
I know Zuck is no schmuck, and I was scratching my head when Google bought YouTube for 1.6 billion, (which turned out to be a fantastic investment) but I simply can’t put my head around that figure for something that is-
1) an application that other than the rapid user base created, not all that hard to reproduce,
2) A product far fewer people would find compelling than being able to to re-discover and communicate with long lost friends.
If someone can please explain to me such a high price for Instagram (which sounds like a drug delivery service) is justfiable, I would love to hear from you.
Facebook's a great company, but there was too much hype that went into the IPO. It’s not exactly a well kept secret, and as the most anticipated IPO in history, Wall Street was bound to try extract from the public as much as the hype could withstand. My friend who works for Charles Schwab was telling me that Grandparents who had barely been on the internet were stampeding to get information on purchasing shares.
Hold off and wait til Facebook goes lower. And if you disagree, we can discuss this. Live even, of course that would be via my telecast on Google Plus Live Hangouts.
funspirit is long GOOG and MSFT. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend 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.