Facebook, A Retail Trap
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Overview
Facebook (NASDAQ: FB) is perhaps the most nebulous publicly traded stock in the market. Facebook reports earnings on January 30, 2013 after the market closes and is expected to hit a $0.11 EPS estimate for the fourth quarter of 2012. Facebook is not an easy firm to understand. Unlike prior retail investor darling Apple (NASDAQ: AAPL), Facebook requires a break with present reality to hope that the company can make money. Most companies are easy to understand, sell a product for revenue, deduct expenses and we have net income. Facebook's main product, however, is free. Facebook's consumer product is Facebook itself, which as long as a person has an email address, can be consumed. Therefore what Facebook really has to offer is its users which Facebook now counts as over 1 billion. Facebook's main strategy for revenue is to find a way to offer up its users to advertisers without infringing on the user experience too dramatically lest the users leave to another social networking site which does not have to impress shareholders and can keep it relatively advertising free. This is no easy task and this has been the basis of the angst amongst investors in this stock. How does Facebook monetize its users? This is a question for which the whole of Wall Street has been awaiting an answer. As the price has risen for Facebook, I have been liking the stock less and less.
Since the chatter of Facebook coming public in 2012, there may be no stock which has received as much publicity as this one. This company has been famously mired in controversy since its inception in a Harvard dorm. 2012 was no different for this social networking titan. From the talk about the roadshow to the NASDAQ issues during the IPO to the precipitous decline and rebound of the price, 2012 has been a wild ride for this firm. This earnings call caps off a turbulent year and has the potential to make or break the stock for 2013.
Who's Buying This Stock?
Facebook's lack of earnings has been blamed for the precipitous drop in stock price since the IPO from the IPO price of $38 to the low at $17.55. With a price to earnings ratio of 307.9, who is actually buying this stock? Key share statistics show that only 37.7% of Facebook stock is held by institutions and only 0.75% is held by insiders. Retail investors, therefore are betting huge on this company. Apple has been another darling of the retail investor until recently. The recent drop in price has sent Apple's retail investors to the exits and one must wonder is this has resulted in the increase in Facebook's share price. Looking at the comparison chart between FB and AAPL, there is a clear reverse correlation between these two stocks.
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Admittedly, Apple has been a disappointment as of late by missing revenue estimates as well we a disappointing conference call and this stock has taken a deserved hit. However, it is now trading at a 10.4 price to earnings ratio in stark contrast to the 307.9 PE ratio at which Facebook trades. PE ratio is different from differing sources but take into account that even a low estimated ratio such as 60 is egregiously high.
The Call and Recommendation
Today's call should answer the question then, "Can Facebook monetize its users?" If CEO Mark Zuckerberg comes out today and is able to provide a real roadmap for long-term growth, I look for this stock to be the stock of 2013. If the numbers are to be believed, one billion users is a lot of wallets which advertisers would like to reach. Additionally, retail investors like to invest in products which they use which accounts for my explanation for the high PE ratio. If, and this is a big if, the 5:00PM conference call inspires confidence, then I like this stock as a long through 2013. However, I do believe in the odd-lot theory to an extent. The less than 50% institutional ownership does not inspire confidence in me on this stock. I am a bear heading into the earnings call and if this call does not give me a concrete monetization plan, particularly on mobile, I will stay bearish on this stock and I recommend Facebook to the short side.
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