I had recommended selling Facebook (FB) due to its expensive valuation, increasing competition and lack of new products. Technology companies can quickly become obsolete if they don't stay on top of their game. There are numerous examples of technology companies "dying" due to dramatic changes in the industry. Social Media has proved to be particularly dangerous with Myspace, Orkut and other social media companies losing market share to new entrants. Facebook which is the world's largest social media company with over 1 billion users is losing ground to new companies. User fatigue has set in with Facebook, as new messaging applications like Whatsapp take away social communication market share from FB. Facebook stock has given large losses to its IPO investors and the stock will continue declining unless the management makes a radical overhaul. Its recent product introductions like Facebook Home and Graph Search have been underwhelming to say the least. Google (GOOG) is also chipping away at Facebook with its revamped social media offering - Google Plus. Though Facebook stock has declined by ~14% since I had recommended selling FB, I would continue avoiding the stock as I think that it will go down more.
Why I continue to sell Facebook
1. New entrants are generating the buzz while FB becomes old and boring - Messaging applications like Whatsapp have become the latest technology trend and people are spending more time on these messaging apps than Facebook. It has been rumored that major technology companies like Google are competing with each other to buy Whatsapp. Facebook is no longer considered young and hip. Technology obsolescence is very rapid in the industry and unless FB ups its game, I think that FB could sink really fast.
2. Google gaining market share from Facebook - Google has increased focus on its "Google Plus" social media offering. The company has managed to increase its market share in "social sign ins" in a short period of time. The company is gaining market share from Facebook. To compound Facebook's problems, Google's old social media product "Orkut" remains highly popular in India and Brazil.
Janrain says that Google continues to gain social login market share as more than a third of online consumers choosing to use their Google credentials to log in to the websites of Janrain customers. The report says that Facebook accounts for 46% of social logins but at the same time sees a downfall of 3% compared to Q4 2012. On the contrary, Google sees 3% gain in its social login share. Its also said that this is the second consecutive quarter where Facebook is losing its ground to Google.
3. New products and services are copies and duds - I have been left unimpressed by Facebook's new products and services. Apart from its popular website, FB has failed to come out with any good product or service. It has been trying to copy or build on Google's products. Facebook wants to introduce new products and services, which would "wow" users.
i) The new "Graph Search" function failed to set the world on fire despite a huge build up to the event.
It's not that the social network doesn't have the data to turn it into a powerful recommendation tool. But for it to be more effective, Facebook would have to greatly improve how it collects information from people going forward, or expand its search powers to comb through status updates and comments. Much of Graph Search's power and problems start with the Like button. People just don't wield the Like as often and as discerningly as is needed to turn Facebook into a useful recommendation tool. It's also too easy for those deep-pocketed companies who can afford to maintain a social media presence to buy more likes and come out on top.
ii) Its new Android launcher "Facebook Home" has also gotten bad reviews. The technology industry requires constant innovation. I don't see this launcher getting much traction amongst Android users. This new app has received lot of bad reviews in the few days after its launch. I don't see "Facebook Home" becoming popular anytime soon.
Within days of its launch, Facebook's newest app, Facebook Home has garnered negative feedback from users who are not too happy with it's in-you-face look. The average rating of the app was 2.3 out of five on Google Play Store. Out of the 3930 people who reviewed it, only 689 people have given it five stars. 1,864 people have only given it one star.
4. User data is overrated - While FB management makes a big deal of the company's huge database of user information, I don't think it is a very strong competitive advantage. The switching cost out of Facebook is not very high in my opinion.
5. Valuation remains expensive - The stock remains quite expensive with a P/B of 5.2x and a P/S of 11x, which is much higher than the industry average. The company trades at a relatively expensive forward P/E of ~37x and a P/CF of ~35x.
Facebook has a huge advantage being the most popular website in the world, with users still spending many hours per week. It remains the undisputed king of social media today despite failing to adequately monetize the traffic. LinkedIn (LNKD) has managed to grow revenues and profits through a focused business strategy. LNKD has managed to keep switching costs very high and has become the most important social media site for business professionals. Facebook needs to redefine and sharpen its focus as well. Instead of copying Google, the company needs to bring out original services and products. Apple (AAPL) became the most valued company in the world by introducing great new products which could not be matched by the competition. Facebook needs to really overhaul its strategy and management in order to succeed.
Stock Price Performance
The company does not have a long operational history but has shown high volatility during its short life as publicly listed security. Facebook has given a ~13% loss to investors in the last 3 months compared to the 2% return given by NASDAQ. During the same period, LinkedIn and Google have given a profit of ~47% and ~13% respectively.
I think that Facebook might be a good short in the technology industry, considering its large market capitalization and low competitive barriers. In the technology industry "only the paranoid survive". Facebook management on the other hand looks complacent bringing out lame copies of Google products. The company is losing market share in its core social media segment as well. Users are finding FB boring and old which is a huge problem for a social media company. We have seen in the past how social media companies can quickly become obsolete. FB is a "one trick pony" and cannot rely on other income streams in case of a slowdown in its core segment. I would continue to avoid the Facebook stock.