Sell If Facebook, Zynga Don't Talk Strategy
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It may seem as though everything that has needed to be said about Facebook (NASDAQ: FB) has been said. I felt from the beginning that the $38 IPO price was a made-up number to cajole investors into a poor stock with an unsustainable business model. Many commenters did not voice this; however, it became obvious to everyone by the stock reaction. But the scary part about all of this is… we are the stock market! Why would we "like" it one minute and then start "unliking" it the next?
In my view, Facebook's 50% fall is an exercise in animal instinct. When prompted, we act in desperation. Just like the bubble came through investor exuberance, the burst came through investors rushing to being the first to sell off rich and not be the "sucker" holding the bag.
As it stands, most IPO shareholders are left with a stock that still remains a story of hope. It is this facet of the stock that I do not believe has been mentioned much through media commentary. Stripped from meaningful fundamentals, Facebook sounds compelling as it rises towards 1 billion users, so investors are "inventing" their own stories of "what might be". Maybe Facebook could start monetizing their base through offering pay-for services? Maybe they could package information to ad agencies? Maybe they could integrate ads very well on mobile?
But beneath these positive speculations, there is a lot of uncertainty. When will the next hot social network arise? Are social networks even here to stay? And is the competition too intense for any meaningful expansion? The balance of these uncertainties and hopes will balance where the stock goes from here.
Some 51.7 million shares are traded each and every day - around 2.4% of the total number outstanding. These shares are only worth as much as what the next seller feels that the next buyer will purchase them at under a sustainable rate. Poor performance by Facebook that includes deceleration in earnings growth has ruined the promise. Going forward, Facebook must focus on unveiling new strategies to monetize… the current one is simply not working well enough. That does not mean the company should scrap its current idea of advertising, but, rather, that it should complement the current revenue line with additional monetization methods.
Many market commentators have stressed Facebook as being a threat to Google (NASDAQ: GOOG). In my view, however, Google is the threat against Facebook. From strong integration through YouTube to Gmail to the Android mobile operating system, Google has a far more sustainable economic moat than Facebook does. It's not so much that Google has out-innovated Facebook as it is that the social engine giant has made the social network largely irrelevant. Through the creation of Google+, which is smoothly implemented into Android users, founders Sergey Brin and Larry Page have stressed how social networking should be more of an "extra" service than a "core" service.
If you can recall years back, AOL Instant Messenger used to have its own "core" service of instant messaging. Google put an end to this pure market through adding a chat feature to its Gmail system. It has done the same for social networking by puting the link to one's profile in the top-left hand corner of the Google bar, as if to say "click on me if you want, but don't depend on me". The idea that people will continually go to "facebook.com" when it ought to just be an extra feature that is part of, say, an email platform will become, in my opinion, ridiculous in a few year's time. Accordingly, I recommend buying shares in Google as a way to bet that social networking's craze will die down.
Zynga (NASDAQ: ZNGA), in my view, can't exist without Facebook. Its dependency on social networking, to me personally, comes across as equally desperate as the Facebook IPO. It was a quick way to game the fad, but it won't sustain itself against traditional video game brands, like Activision Blizzard and EA . Like Facebook, it has lost nearly around half of its value from the 52-week high.
Perhaps Zynga and Facebook should forge a partnership in mobile to create some sustainability. Right now, however, that certainty (the visibility of a path forward) is simply not there. Instead, we have to bet on the brains of Zuckerberg and Pincus. Management, however, often becomes isolated from shareholder demands, like Yang at Yahoo!. And boards become entrenched. After achieving so much, I do not feel that neither management nor the board will rest on their laurels; however, I believe they have run out of options and are becoming increasingly backed into a wall. It is likely they will introduce strategies towards monetization, but I do not believe that they will be construed as genuine if results are weak. Either way, they must keep the hope alive through introducing "turnaround" strategies.
After the world's most hyped IPO turned out to be a dunce most investors probably don't even want to think about shares of Facebook. But there are things every investor needs to know about this company. We've outlined them in our newest premium research report. There is a lot more to this company than meets the eye, so read up on whether there is anything "like" about them today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services recommend 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.