The Facebook Hurricane: Wait it Out
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Of all the companies that have given social networking a try, Facebook (NASDAQ: FB) has been both the most popular and the most troublesome for investors. Of the company's available shares, 16.5 percent are sold short amidst a number of factors. The most often-cited factor is Facebook's apparent incapacity to “monetize its mobile user base.” This shortcoming, along with the lock-up expiration of about 225 million shares at the end of October and 777 million shares in November, has been feeding bearish outlooks on Facebook for the last few months. Barron's cover story slapping a price of $15 per share on the stock—about a 23 percent decrease from present levels—certainly didn't fuel confidence. This was likely not met with enthusiasm among the many hedge funds with holdings in Facebook (view them here).
However, in the wake of a positive earnings report, Zuckerberg & Co. managed to increase ad revenue 32 percent year-over-year and reported a 28 percent year-over-year increase in daily active users. The story of “popular opinion” about Facebook as an investment seems to be entering its next chapter.
Facebook claims a membership of around one in seven people in the world (whether or not this is exactly accurate is a subject of debate), therefore situating itself against Google (NASDAQ: GOOG) as the best advertising opportunity in the world. But what's the issue with Facebook? Yahoo Finance's Jeff Macke bluntly stated that Facebook needs to realize “not just how to monetize their mobile users but how to sell anything. Until Facebook does that, the stock is not at a bottom as far as I can see.” The hopes of a Facebook phone have been dashed, and there is no quick fix to Facebook's mobile problem. And the present shot of optimism over earnings, leading to a higher share price, makes it a riskier time to initiate a position in Facebook.
Investors have been generous to some of Facebook's peers in this respect, such as LinkedIn (NYSE: LNKD). LinkedIn's IPO in May 2011 opened at $45 a share, and shares presently trade at slightly over $105. Facebook has been receiving intense scrutiny from commentators like Macke claiming that Facebook's advertising revenue leaves much to be desired. However, this is perhaps even more true of LinkedIn. On a price/sales basis, LinkedIn and Facebook have multiples of 15.5 and 11.8, respectively. This means that Facebook's share price is actually cheaper when it comes to revenue generation.
The discount attached to Facebook shares is partially due to the differences between LinkedIn's business and Facebook's business. LinkedIn, as is often overlooked, provides a number of professional services that link employers with potential employees. This particular niche is lucrative since it provides a concrete service. However, the current pricing of Linkedin means that the company must innovate and grow extensively in order to justify the pricing of its shares. This, however, involves cutting into margins in order to grow the business, which could hurt bottom-line earnings.
Interestingly, though, Linkedin's Co-founder Reid Hoffman talked up Facebook last month. His advice: Give Facebook a closer look after the major share lockups are finished so that investors can see how the “market responds.” The biggest lockup of 777 million shares ends on November 14, so that might be judgment time for investors.
Facebook is also trying to diversify its advertising approach by introducing new buttons like the “want” button, which would allow the company to make much more money per user than off of mere banner advertisements. The launch of iTunes 11 with Facebook integration could be a significant catalyst—iTunes and Apple's (NASDAQ: AAPL) App Store are inherently cross-platform and mobile-ready. The “Collections” idea is Facebook's offering to the world of merchandise, enabling socially interactive ways to shop online. These partnerships with some of the most important online merchants could be just the “real deal sales” that analysts like Jeff Macke are looking for. But the message is clear: Wait out the storm before buying.
This article is written by Brian Tracz and edited by Meena Krishnamsetty. Brian has a long position in Apple. Meena has long positions in Apple and Google. The Motley Fool owns shares of Apple, Facebook, Google, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Facebook, Google, and LinkedIn. 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.