I don't short stocks except in TMF's CAPS (under a different older alias) stock picking competition where I wanted to red thumb Facebook (NASDAQ:FB) right after the IPO. I got too cute holding out for a day or two hoping for a little more insanity and missed that opportunity. My thesis for red thumbing Facebook was simple; the market was pricing it like it was the next Google (NASDAQ:GOOG) when in fact it was really the next Yahoo (NASDAQ:YHOO). While its product may be great, its business of selling banner ads is mediocre at best, and has about the upside of Yahoo, and therefore Facebook should be valued similar to Yahoo.
I could probably write an article just on the investor biases that caused me to screw up red thumbing Facebook right after the IPO when my thesis for doing so was playing out right in front of my eyes. I missed that opportunity, but decided to take advantage of the recent bounce back to finally pull the trigger. Even though Facebook is well off of its IPO price, it is still trading for a market cap of around 14X revenues, which will require a business with orders of magnitude and more revenues and profits than its current banner ad model. The bull argument I heard leading up to the IPO, and today on their announcement of new search functions, is that Facebook has some mythical treasure trove of user data that they can mine to produce targeted ads that will be some sort of holy grail of advertising.
My gut feeling was that Facebook user pages are full of useless blather, and this treasure trove of information was a bunch on nonsense. The fact that Facebook has been around for a few years and they still haven't figured out how to monetize this supposed data was proof in my mind that it wasn't so easy. However, I have another angle to look at this from as well. Some time, maybe a year or so ago, I noticed Comcast (NASDAQ:CMCSA), my HSI provider, started offering pop up coupons for just about every site I visited that sold some sort of product or service. I also noticed on their home page they tailor news and articles to where I live and offer ads for businesses in my area. In other words, they are using data they have like I'm visiting a site that sells something, so I might be interested in a coupon to sell ads very well-targeted at me.
I had assumed that since I never saw an article discussing Comcast even doing this, let alone that is was successful, that this wasn't a "holy grail" for Comcast. For the purpose of this article, I took a peek at Comcast's latest 10Q and their ad revenue in particular. While ad revenue is up 23.5% y/o the explanation below shows very understandable reasons that have nothing to do with their new targeted online ads.
Our advertising revenue increased for the three and nine months ended September 30, 2012 compared to the same periods in 2011 primarily due to increases in political and automotive advertising revenue and improvements in the local and regional advertising markets.
So it appears that Comcast, which has the ability to follow me around as I browse everywhere on the web and can provide offers from many of the sites I choose to visit, apparently isn't setting the world on fire with this "treasure trove of information," and the market hasn't even taken note of this. Yet Facebook is going to turn the blather people put up on their Facebook page into business orders of magnitude, larger than what they are doing right now? I seriously doubt it.
To wrap this article up, I'm going to do a little back of the napkin valuation comparing Facebook to Yahoo in order to get a sense of how overvalued Facebook is, if I'm right, which I'm pretty confident that I am. 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. As I've argued, I don't think there is much difference between the two; in fact, their revenues are similar right now, so we can assume Facebook's actual business is worth ~$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 ~58% haircut as they come back to earth. 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. As I mentioned to start this article, this is just points in a game to me, however for those who do short and can handle volatility this looks like a good candidate to me.