Will Functionality Make Facebook a $60 stock?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The great debate from the dot.com boom and meltdown era of the promise of functionality in a publicly traded company as opposed to the profits that are actually delivered on its financial statement is being relived in the downward sloping share price trajectory of Facebook (NASDAQ: FB). At great cost and great chagrin to the shareholders of Facebook, more now prefer what will appear on the left side of the income statement rather than what is anticipated as its functionality potential.
"Functionality," as defined by Merriam-Webster, "is the quality of state of being functional" (try taking that to the bank!) That was the tragic result for many shareholders of dot.com stocks from the early 2000s who had banked on the "functionality" of a company when investing. In an article in the most recent Esquire magazine by financial columnist Ken Kurson, Facebook is touted as being worth $60 a share.
Kurson's piece, "Facebook's Killer Body," notes that, "The stock is a dog and will be until next year." That is due to it having the "most badly botched IPO for any stock." Additionally, the "...struggles will continue through the end of this year because nearly two billion shares held be insiders will periodically come onto the market as their lockups expire-every time there's a minisurge, they'll sell."
Despite all that, Kurson is bullish, expecting Facebook's stock to triple, as the company is "...insanely attractive. With 901 million users, its got about 58 percent of all Internet users in the free world. But's what Facebook can do with those users is incredible. Facebook knows more things about about more people than any country in history...Goldman Sachs estimates that admission beyond the Great Wall will mean an instant $1.7 billion in additional revenue.'
Enter, stage right: functionality dilemma for Facebook
As Kurson writes in his article in Esquire about all that data and Facebook, "And to date, it's done very little with what it knows, content to follow the college DIY ethic that made it such a growth animal." He is also so bullish as he feels that eventually Facebook will employ "...grownup sales people and leverages its massive database to target its ads more effectively, ya gotta think the number..." increases five-fold for advertising revenue based on costs-per-impression rising from 20 cents a present to one dollar eventually.
The only problem with that analysis leading to the share price of Facebook tripling is that companies with "grown-up sales people" such as Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT) and Yahoo! (NASDAQ: YHOO) with a "massive database to target ads more effectively" are realizing nowhere near the results needed for the 300% jump. Microsoft just wrote off the entire $6.2 billion cost for aQuantive, an on-line advertising company it acquired in 2007.
While Yahoo!, Google, Apple and Microsoft do not carry the lofty valuations of Facebook, each has tremendous pricing power. While Facebook may be able to undercut the current price charged by Yahoo! and AOL for costs-per-impression as Kurson mentions in his Esquire article, there is nothing to keep it from being dropped by companies to destroy any new competition. In addition, the mere fact that neither AOL or Yahoo! is dropping the price to the level now charged by Facebook evinces that the company is not viewed as a threat to this line of business by either.
And while nothing is certain in the stock market, two things are clear here: Google, Apple, Microsoft, Yahoo! and AOL will not let Facebook beat them on price, that is the first. The second is that there is no way the share price of Facebook will triple in a price war with AOL, Apple, Google, Microsoft and Yahoo!
As it will be the market that takes Facebook from its current price level of around $20.60 a share to $60, it is useful to check with what the investment community is stating at this time. At present, there are eleven analyst recommendations from eleven investment firms for Facebook listed on www.finviz.com. Only one is a Buy: from Needham with a target price of $40; and made an epoch ago in the annals of Facebook on May 23, 2012, in the halcyon days of yore, less than a week after its initial public offering. The highest target price from any analyst currently listed is $41 issued by Oppenheimer on June 27, about a month before the plunge in Facebook shares due to disappointing earnings.
Overall, the mean analyst target price for Facebook over the next year of market action is $36.40. While that is a nice jump from the current price level, it is a long, long way from $60 a share. It is difficult to imagine "functionality" making up the difference at this stage for Facebook.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Apple, Facebook, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Facebook, Google, and Yahoo!. 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.