Facebook: Stock Price Isnt Everything

| About: Facebook (FB)

Summary

This is a friendly critque of Alex Pitti's recent Facebook article.

While it is decent, there are a few things he could consider.

I go over a few of them in the article.

This article is a critique of Alex Pitti's recent article on Facebook (NASDAQ:FB). It is not meant to condemn or criticize him, but to further our understanding on the misuse of statistics and other terminology.

There are a couple of things I see wrong. The big one is the Piper Jeffrey survey.

Survey

A sample of 10000 is out of line. These guys do not understand the fundamentals of a distribution curve or statistics. In order to have a significant value based on a 95% confidence interval 1000 is more than adequate. In running these types of surveys, we are trying to measure where the true population of the sample lies.

Because these types of surveys are based on confidence intervals,the margin of error gets reduce e.g. 1/sqrt (10000)=0.01. You would think that is good, but it is not because you have defeated the purpose of statistical testing and every result has become significant as in the survey.

Now there are other things in the survey as well. We do not know if these teens are representative of the entire population of teens. A teen born in USA is going to behave differently than a teen born in Jamaica. We don't know how may teens even failed to answer the questions.

Also, though the average age is 16, what is the race and standard deviation of the teens, gender, and education levels. These are questions to think about. Are the same teens being polled every time the survey is taken? If so, this would be one step closer in the right direction as a longitudinal study would focus on how the groups' behavior changed over time.

The number one cardinal sin of this study is that none of the variables in the years given have percentages that add up to 100%. That alone is enough to discredit the survey.

Also, teens do not control the social media market, they are a segment of it. Using the Austrian School of Economics logic, what may be relevant know will not tell me what will be relevant in the future. This means that focusing on the teens will tell me how the social media market was in the past. It has not bearing on the future because I cannot replicate in the future all the variables that might have made teens somewhat relevant.

Innovation

Next, Pitti makes this motherhood statement. "Facebook will have to innovate on its own to actually grow its relevancy."

That is real easy to say. What kind of innovation are we talking about? There is disruptive, process,run-on,product, incremental, open, network, and ICT. I can list many more, but I will restrain myself.

In understanding competitive dynamics of an industry in general, firms can either chose to innovate their business model on their own or acquire a company that has the innovative business model. The way Facebook has been handling acquisitions, buying companies and letting them function on their own, has been shown in the academic literature to provide benefits to the acquirer rather than merging the operations with the parent company. Acquisitions,themselves can be considered a form of innovation due to the resources and capabilities they bring.

Internal innovation is costly. Due to the speed at which Facebook competitors can respond, it puts the company at a disadvantage to continually innovate as Facebook is in what its known as a high velocity environment. However, Facebook has adopted what is known as open innovation by allowing amateur programmers to contribute by notifying Facebook of bugs and by allowing application developers to use the platform. Don't assume innovation is a new iPhone. That is grade school level thinking.

Performance

Lastly, what about other measures of firm performance? Stock price is such a small part of it. There are four categories: accounting based, sales growth, market based, and managers perception. Stock price is not a great measure of firm performance because it only shows the shareholders view of the firm. The other three measures are from the standpoint of managements decision making and should carry more weight than a silly stock price.

Conclusion

The economy is one of the last things you need to worry about. That is management's problem. If Facebook's management team is good, they will do the worrying for you. If Alex took these into account the argument would be stronger or have a different outcome. Thus, we cannot conclude whether Facebook is a short.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.