Facebook, Inc. (NASDAQ:FB)

CAPS Rating: 2 out of 5

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Player Avatar MKArch (99.67) Submitted: 1/15/2013 2:08:28 PM : Underperform Start Price: $31.05 FB Score: -87.75

I was chomping at the bit to red thumb Facebook on their IPO and blogged about it in the link below, however I missed my chance getting to cute holding out for a little more insanity in the day or two after the IPO. Although not quite as insanely priced as IPO day Mr. Market is giving me another shot at red thumbing FB.

http://caps.fool.com/Blogs/my-pending-facebook-red-thumb/713897

Here's my short form thesis: Facebook is not the next Google it's another Yahoo. Based on it's current market cap the market is split between whether it's the next Google or Yahoo pricing it somewhere in between. When you get down to it Facebook may be a great service but it's business of selling banner ads no one ever looks at is mediocre at best. I ain't buying mining the useless blather people put on their pages for useful data is going to amount to a substantially better business. At their current market cap of $66.7B something like 14X revenues they need a whole new killer business that know one knows about just to justify their current market cap.

Both FB and YHOO have substantial net cash positions (cash less debt) that I'll give them credit for in my thumbnail valuation. With a market cap of ~$23B less ~$7B net cash the market is valuing Yahoo's actual business at ~$16B. I don't think there is much difference between the two and if we assume FB's business is worth about $16B and add in their ~$10B net cash you get a fair value market cap of ~$26B vs their current market cap of ~$67B. That would be ~62% haircut as they come back to earth. If the S&P continues to rise as the U.S. recovery marches on I get more points and if it turns out (as I suspect) that in a couple of years obsessing over your Facebook page is "so 2010" the bloodbath in FB could be even worse and more points for me.

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Member Avatar mavrikx (< 20) Submitted: 1/23/2013 4:23:04 PM
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Are you as bearish on FB after learning about the marketing possibilities of graph search?

Member Avatar MKArch (99.67) Submitted: 1/23/2013 5:23:24 PM
Recs: 1

mavrikx,

Facebook needs orders of magnitude more revenues than they generate now just to justify their current share price. I seriously doubt that culling through the useless blather people post on their pages is going to result in enough relevant banner ads that people just out for cheap voyoueristic entertainment will actually click on. As a frame of reference FB is generating ~$5B/ year in revenues which is about on par with what Yahoo generates as well. FB needs to generate on the order of 5X that or something like $25B in revenues just to be worth what it's currently trading for. Ultimately Facebooks ads need to translate to sales for businesses paying for the ads. How much more sales are going to be generated advertising music or tv shows to people who already said they like them? Isn't that preaching to the choir? IMO grapg search is the product of no better ideas about how to monetize the user base not some revolutionary new business plan.

Member Avatar MKArch (99.67) Submitted: 7/28/2013 4:02:50 PM
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http://www.forbes.com/sites/timworstall/2013/07/27/an-interesting-theory-about-why-facebooks-mobile-ad-results-might-not-be-as-good-as-they-seem/

I don't think this is just a possible explanation of how Facebook miraculously found a way to get people interested in annoying unsolicited advertising, I think this is the most plausible explanation. They trick users into accidentally clicking on oversized ads on tiny screens. I agree it won't take long for companies to note no translation to sales and cut back on Facebook advertising. I still say this is Yahoo's business model approaching a Google price tag. The immutable laws of physics will ultimately prevail.

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