Not Letting Bull Runs Fool You & Going With The Underdogs
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In my view, tech users often suffer from myopic investing outlooks. This is evidenced by how it is very difficult to successfully short some of the most overvalued stocks (I'm referring to you Amazon). In this article, I present short-term market recommendations to exploit this heightened degree of speculation that has sent today's dot-com stocks up and down...
Don't Let Facebook's (NASDAQ: FB) Bull Run Fool You
Many are speculating that the future Internet leader will be the company that best monetizes mobile users. Facebook is targeting this perception by prioritizing mobile solutions over PC solutions. The recently launched Graph search, for example, targets mobile functionality. With smartphones becoming increasingly popular, more advertisers are turning to it. At the same time, mobile advertising suffers a bit of a "real estate" issue, wherein users have their screens irritatingly covered by ads. So, it will be difficult to monetize in the long-term (i.e. users are likely to switch to apps that don't clog their screen.)
Apple and Google may currently reign supreme in mobile with their iOS and Android operating systems, but Facebook is now developing a new Messenger app--alongside its other apps--which will allow companies to advertise themselves to over 1 billion Facebook users. Now Facebook is looking to increase earnings in the mobile advertising market as a percentage of the bottom-line from 14% in 3Q12 to 18% this year. Mobile ads grew 300% in the last months of 2012.
And what better way to celebrate its focus on mobile than to debut 2013 on the NASDAQ 100 alongside the likes of Apple, Google, and Microsoft. But the stock still trades excessively high at 45.6x forward earnings. In my view, analysts are still overly bullish on the firm. Merrill recently announced that Facebook could produce around $500 million in revenue per year if just one ad is clicked per user each year, which is a great way of illustrating the power of Facebook's membership base. But the core business--the sustainability of social networking--in my view is very questionable. What makes investors believe that Facebook is any more sustainable than MySpace? Will its size sustain the foundation?
Maybe it's just me, but I certainly don't hear so much about Facebook these days. It's no longer "cool" to talk about "friending"--it's just something you do. And just like people have moved away from caring about texting, they are just as likely to do the same to Facebook. SocialBakers recently released analytics that indicated the number of active users in the United States and United Kingdom fell by 1.4 million and 600,000 respectively in December. I think is really a big deal (adding data behind by anecdotal experience), and something both market commentators and investors have yet to give enough attention towards.
To put the active user loss into perspective, consider that Facebook has 167.4 million users (not necessarily active)--a penetration of 72.9% of the online population. If it continues to lose active users at the current rate, it would see its user base decline by at least 10% by the end of the year! This does not even consider the impact of non-active user loss.
Is Zynga A Better Deal Than Groupon (NASDAQ: GRPN)?
Groupon, as well as other related Internet companies, saw a fall in their stocks on the holiday sales days--including New Year’s Eve. The Chicago daily deal company’s fall was 3.9%, or $0.19, because of fears from the fiscal cliff. Now that the fiscal cliff was resolved, Groupon is regaining ground, but it’s still characterized as a “struggling company”. Even though they are thought of as a struggling company, they recently had plans to acquire a UK luxury goods online retailer Achica for £80 Million. But even Groupon's own corporate deal was, fittingly, turned down. It was turned down, because it was believed to undervalue the retailer. No further bids were made, which raised concern over whether Groupon's initial offer was too low to start with (often with deal making, you "start with the sun" and "settle for the moon").
Now Groupon is considering entering the mobile market with its mobile payment platform, which will drive more companies to use their discount vouchers. More news on this is expected in mid-2013, and I believe it has yet to be fully appreciated by the market. My optimism on a firm's future is always considered in the context of the market's views. Right now, the stock trades at 20.6x forward earnings, which is quite reasonable in light of a 27.1% annual EPS growth rate forecast.
But if you want mobile exposure, I would consider preferentially buying shares of Zynga (NASDAQ: ZNGA). The stock trades at less than 20% of its peak price, and I believe investors will start jumping on the social media game developer when it returns to profitability next year. It is developing online gambling sites that will have functionality on mobile devices--a kind of focus that I believe will re-energize investors when data inevitability rolls out about how the majority of phone users have smartphones. Buying at this bargain price for a company that I do not even consider independently strong is risky and goes against Warren Buffett's strategy of "buying great companies over cheap ones", but I think it's worth it as a speculative bet. The reason why it is worth it is because of trends at other peers, like Facebook and Groupon, where a bit of a "dead cat bounce" has been experienced. That is to say, both Facebook and Groupon experienced considerable depreciation only to then surge from the 52-week low. I believe something of a rally is therefore in store for Zynga, which has multiple triggers in social gaming.
TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. 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. Is this post wrong? Click here. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.