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The Puzzle of Facebook

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June 07, 2012 – Comments (1) | RELATED TICKERS: FB

Location: JaysRage CAPS Blog

Author: JaysRage

It seems that everyone and anyone has an opinion on Facebook stock.    I'm going to lay my thoughts on the table too.    This might be the most polarizing stock that I have ever seen.   I think part of it is that Facebook has been a part of major social change and is a polarizing company that people have strong opinions about, regardless of the stock. 

Strengths of Facebook as a technology

1)  Social Networking -- This is certainly the first, foremost and easiest part to recognize the value of Facebook.   How effective is Facebook at bringing people together?   It is very effective.    Old classmates, old co-workers, relatives in other states......Facebook makes it easy to reach out to others in a way that doesn't require time coordination of schedules and yet it's more personal than e-mail.    The drawback of this is it exposes people to public spotlight in ways that only celebrities have had to endure previously.    Many people do not enjoy the invasion of their privacy and would rather give up on Facebook than learn how to put walls around their engagement.    Social networking is as old as the internet itself.   Facebook is just really good at it.  

2) Picture and Video Sharing -- There are several photo sharing mechanisms out there....Walgreens has a platform....and several others.   Facebook has done an excellent job of making photo sharing very easy.  Tagging is a great way to alert people that valid pictures are available.    Grandparents everywhere are thrilled to have 24-7 access to every detail of their grandchildren's lives.    This got even better with the purchase of Instagram, which was an excellent purchase choice for Facebook.  Pictures and Facebook are important links to each other.    This is something that Facebook needs to continue to do well, and it looks like they have every intention of doing so. 

3) Gaming -- Facebook is a poor gaming platform for sophisticated games.   The only value that is added is the pre-existing social networking that is built in.   Other than that, Facebook is downright dismal in this area.    To me, it's not surprising that Zynga is looking at alternatives.   However, Zynga may need Facebook more than Facebook needs Zynga.   While they are the cream of the Facebook game genre, that merely makes them a one-eyed giant in the land of the blind.  Frankly, Zynga's games are nothing special when compared to stand-alone gaming available elsewhere on the net.    They aren't going to get hard-core gamers to play their games, and they will have a hard time convincing light gamers to follow them off of Facebook.    While this has been a nice gravy train for Facebook, this is NOT where Facebook is going to earn its bread.  

4) Targeted Advertising -- Facebook is below average at using the wide swaths of data available to them to help create effectively targeted advertising.    They miss their mark far more often than the top dogs such as Google and Amazon.   However, this is also a very immature part of their business.   Most of the history of Facebook has been focused on growing and enriching the user experience, which was the correct approach.   There will be more pressure to get better in this area because of the clear path to earnings.    Facebook definitely needs to get better here.   More focus is necessary, but not at the expense of the network.   If Facebook gets just a little better, the monetary results will be stunning.  

The key to Facebook's success will be to continue to enrich the user's experience while still spending enough resources on getting #4 right.   If they get #4 right, the click-throughs will happen.  They aren't there yet.   There is reason to believe that they can get there from here. 

My other area of thought is of Facebook as a part of social culture.   I see a lot of people calling Facebook a fad.   While it's possible, I also remember these other significant pieces of our culture being seen as fads with significant resistance for long periods of time....

1) Cell-phones

2) Internet

3) E-mail

4) Television (radio was king)

The list goes on and on.    To be honest, I find the adoption rate of Facebook to be staggering in comparison to the list above.   It provides value to people's lives with minimal investment.   There is a lot of reason to believe that it will have a lot of staying power.      

Misc thoughts 

For the record, comparing Facebook to "any other dot-com stock" is a very weak argument.   The garden variety dot-com stock had hundreds of customers, not nearly a billion users.   I will accept Yahoo as a valid comparison as a first-mover tech stock with a wide moat who failed, but Yahoo failed because it let Google eat it's lunch, not because it didn't have a good thing going.   Will Google play grave-digger for Facebook too with Google+?   It's possible.   Yahoo's arrogance and complacency speeded its downfall.   Will Facebook fall victim to the same issues?   It is a risk.  Zuckerburg is not short on confidence.   I think we'd be able to see that one coming for a while before it hits Facebook in the still growing pocketbook.  

Chart Valuation

Facebook looks like it has some room to move downward before it stabilizes.   The chart is downright nasty.    I think it's undervalued right now, but I'm in the minority, and there is no reason to buy higher than necessary.    I do not currently have a real life position, and I continue to watch it move downward to project an eventual landing point.    I've seen projected fair valuations move from 30 to 25 to 15 to 10 from "analysts", without any change in the baseline analysis.   I think the area of   $23.5 will be key.....because I think Facebook will drop below 25, and I think losing that level will cause an immediate drop to $23.5 because I think 25 is a mentally round number that makes a natural line-in-the-sand.   If it does not stabilize at that level, then I think the bottom will be below 20.    I will be watching with interest when FB goes below 25.   I would see an entry point at $23.5 as very good value.   Under $20 would be an even better value, obviously.   I have a hard time seeing 15 as a reasonable possibility. 

Disclosure: Currently looking for an entry point south of $25. 

1 Comments – Post Your Own

#1) On June 07, 2012 at 11:22 AM, Goofyhoofy (< 20) wrote:

1. Those "significant pieces of culture" which weren't adapted as fast cost money. Every one of them was EXPENSIVE at first, which obviously would dramatically slow down the adoption rate. Let's hypothesize how Facebook would have done if there were a $500 entry fee for the first five years, followed by a $250 fee five years later. Then you have a comparison.

2. Facebook has indeed garnered many adherents, but in the company's new rush to monetize they are making some serious mistakes, including and especially the latest, using user "likes" to endorse ads from companies. This is wrong, very very wrong. They are allowed to make mistakes, just not too many, and not so invasive as to alienate users.

3. There is no denying the power of 900,000,000 users, and I am sure they will find new and more effective ways to monetize that audience. That said, it may take a while. There are two kinds of advertisers: those who want to be first on the block with a new toy - and the vast majority who say "Show me." Facebook has already gotten a good helping of the early adopters, but the departure of General Motors (and others) means they now have to run twice as hard just to stay even. They will, I'm sure, but it ain't easy.

4. Nobody knows what a "real value" for Facebook is at the moment. There are numbers floating around, but they are essentially meaningless until the business settles and performs for some (finite) period of time, and investors see how stable their revenue streams are and how those might be attacked by other entrants (gaming, for instance. The history of video gaming has been boom and bust since the 1970's, each time operating on a new and different platform.)

Facebook, at the moment, is a game for traders and gamblers, not for investors, except perhaps for those prescient few who can predict how this will all shake out in the years ahead. 

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