Fall of House of Zuckerberg: Winners

By Jane Genova - August 27, 2012 | Tickers: AAPL, FB, JBLU, KRFT, LNKD | 0 Comments

• Email
• Print

Facebook (NASDAQ: FB) faces four more lockup expirations.  They will be in October, November, December, and May.  After that process is completed the current stock price hovering around $19 could seem high. In a pep talk to employees, reports THE WALL STREET JOURNAL, the company’s chief executive officer Mark Zuckerberg said there are future developments the media don’t know about. Yet, cagey leaders as well as those in distressed companies frequently leak to the media positive news way before it is public to boost the stock.  So, whether Zuckerberg can turn around the company in ways to encourage investors remains to be seen.  Meanwhile, in comparison, those companies not committing the same “sins” sure shine brightly.

Paradigm-Shifting

Among Facebook’s sins has been, as THE NEW YORK TIMES reporter Peter Eavis puts it, that it presently suffers from the “curse of the ordinary.”  That means investors can factor out any revolution or paradigm shifter to create a lot of future wealth. 

In contrast, there’s LinkedIn (NYSE: LNKD) which is currently changing a number of games.  One is, as many know, how employers recruit and job applicants search for work.  Another results from how it collects and aggregates occupational data in real time.  Already the White House Council of Economic Advisers has used that information about growth and decline of industries and job titles.  A third, observes THE ECONOMIST, could be the whole way in which economic research is conducted and reported.  Its stock price is at $101+ in a 52 week range of $55.98 to $120.63.

Another company not cursed, of course, is Apple (NASDAQ: AAPL).  Investors, who put the stock near the 52 week high of $648.19, are convinced the company’s future will continue to be filled with, to use the cliché, revolutions.  FBR analyst Craig Berger predicts the next iPhone will have the most impact of all its devices. And Jefferies analyst Peter Misek reports in FORBES that the iTV is in production and could be in the market by the end of the year.  Other analysts and investors aren’t as convinced that Apple has its arms around its version of iTV, at least not at this time.

Cost Structure

Cost efficiency has become a religion for many investors.  The stocks of heretics get punished, as have those of not only Facebook but also Groupon and for-profit educational companies.  All of their marketing expenses are high.  Incidentally, to reduce costs, Apple has been downsizing personnel in some of its UK retail stores which, some investors assess, had been overstaffed.

In addition to preserving capital, cost efficiency also helps insulate companies from being blindsided by low-cost competitors.  The classic example of that was Marlboro Friday, April 2, 1993, when the then Philip Morris cut the price of Marlboro 20%.  Generics had eaten into its market share.  The company went into a panic. The stock fell 26%. 

Also, cost efficient companies tend to do other things right too.  An example of that is discount airline JetBlue (NASDAQ: JBLU). A recent J.D. Power and Associates survey of 13,000 airline passengers found that low-cost carriers like JetBlue ranked significantly higher than network carriers like United and Delta.  Discount brands can take on the superhero aura of the feisty underdog which manages to hold up against establishment players. That can generate customer loyalty.  It certainly seems like keeping a lid on costs has become a necessary brand attribute.  JetBlue’s stock is at $5+, with a 52 week range of $3.40 to $6.32.

Company Growth, Not Just Revenues

Slower growth is the Facebook albatross.  If Facebook reduces expenses it could boost gross margins.  But as investors know, without real growth in what the company actually does, that can reach the point of diminishing returns.  The legal sector is learning that lesson. After the balloon burst in 2007, it significantly cut costs.  But as an industry it's stuck because it hasn't figured out how to grow in a very different marketplace, e.g. a buyer's one.

Growth is exactly what is expected from Mondelez International, that will be formed when Kraft (NASDAQ: KRFT) splits into two.  Mondelez consists of global snacks.  Unlike the other part North American Grocery, growth will come from emerging markets.  Although their own rate of growth has slowed, it still is faster than that of much of North America.  Also, the world loves snacks – more and more.  In some emerging markets, there is more snacking or eating on the go than traditional meals.  In anticipation of this growth, the Kraft stock is at $40+, with the 52 week range of $31.88 to $41.50.  However, Warren Buffett has recently reduced his position in Kraft.  That is surprising since splits are in fashion. Some shareholders are impatient for PepsiCo to divide up into the faster-growth snacks and the slower-growth beverages.  And there's also growing pressure for Procter & Gamble to split.  Buffett also reduced his position in P&G. 

This issue of Facebook’s constrained growth has put out there the possibility that all the friending could be a mere fad, not a sustainable trend.  Of course, that kind of thinking leads to questioning if ZYNGA’s online gaming is also a fad that was fun and now is done. So, the winners could well be those safe harbors like utilities.  As the bard of Avon Shakespeare observed in his history plays: The crowd is fickle.  Likely investors don't want to be burnt again, at least not in this same way.

Warren Buffett Mindset

Chastened investors might come to embrace or to return to Warren Buffett’s fundamental of only investing in what they understand.  One might wonder if Zuckerberg understood Facebook, at least the business model.

• Email
• Print
• Feedback