It's time to Party Like It's 1999. With the recent Facebook (FB) IPO, we went back to the future to worship the mighty dollar in the form of rampant speculation, whisper numbers and media hype. This time around, however, the feeding frenzy remained relatively contained between Menlo Park and Wall Street. Facebook went public amid a sagging stock market chock full of cynical investors who have already been demoralized by the dot-com, housing, and credit boom and busts of this Dead Money era. Now, after the fallout from its lackluster debut, Facebook must answer the call upon its ability to monetize. Ironically, many calls to and from headquarters will come from the very same Apple iPhone (AAPL), Nokia Lumia (NOK), and Google Android (GOOG) smartphones that will destroy this business.
On May 18, 2012, Facebook went public on the Nasdaq stock market. In exchange for putting up cash, Facebook investors now hold ownership stakes within the business. After immediately spiking to $45 at the opening bell, Facebook shares collapsed to $31 within the next 72 hours, as the earnings potential of this corporation has been increasingly called into question.
Lead underwriters JPMorgan (JPM), Morgan Stanley (MS), and Goldman Sachs (GS) set an initial $38 price for Facebook shares, which translated into more than $100 billion worth of market capitalization for the entire business. According to its S-1 registration statement, Facebook tallied $1 billion in net income during 2011. In its latest quarter, Facebook netted $205 million, which is less than year-over-year $233 million in earnings for Q1 2011.
After Facebook's train wreck IPO, mom and pop retail investors were left holding a toxic bag of assets. Currently, Facebook shares trade for 73 times earnings, while the company's profit growth is clearly decelerating. Facebook is a bit late to the party and the writing is already on the wall: mobile device use is eating into advertising revenue.
Facebook Business Model
Facebook is the capstone event for the Web 2.0 social media business model. Facebook, as a platform, has fostered a flexible online community for witty banter, dating action, business networking, file sharing, and gaming. Today, this virtual world is home to 901 million monthly users.
When navigating Facebook's labyrinth, its users unwittingly offer up detailed information related to their careers, travel plans, earning potential, political views, and social connections. With this information, Facebook can operate as the perfect online advertising brokerage that matches buyers against sellers. Certainly, Menlo Park brass will experiment with various technologies that generate clickable ads for its user base, without taking away from the social experience.
As a neutral businessman, I admire the Facebook brand for its practical ingenuity within the tech space. As an investor, however, I would hate to throw money at an unproven commodity at 73 times earnings. At these levels, there is no margin for error, and any earnings slowdown would trigger further implosion in share prices.
Basic logic would indicate that increased smartphone use is a serious threat to Facebook earnings. The Apple iMac features either a 21.5 or 27-inch screen, compared with the iPhone 5, which will boast of a 4-inch screen. Certainly, Facebook can cram multiple ads onto its online website, without obnoxiously imposing itself as a money hungry corporation. Alternatively, smartphone applications can easily alienate users and destroy the brand, if Facebook does not allow for absolute minimalism in its mobile device advertising.
Facebook investors must look to Pandora (P) as the canary in the coalmine. Pandora is the world's largest online radio company, with 125 million registered users and a 6 percent market share of total radio listening numbers. Despite this market dominance, Pandora still cannot turn a profit, as evidenced by its $16 million loss in 2012. The majority of online radio subscribers tap into this network through smartphones, where the potential advertising revenue inflows cannot match the checks that Pandora executives write on licensing fees to stream music.
Pandora stock peaked at $26 on its first day of trading; and was thoroughly shellacked to $10 over the next year.
Facebook is doomed, if the smartphone market continues to expand and faceless corporations ban social media use on network computers during work hours. Rogue employees would then be forced to check their Facebook walls through mobile devices either beneath tables at meetings or in the men's restroom.
The Bottom Line
I am not convinced that Facebook can monetize its brand enough to justify purchasing stock near such lofty IPO price levels. Handset technology is becoming even more user friendly, as Microsoft (MSFT), Apple (AAPL), Nokia (NOK), Google , AT&T (T), and Samsung are all at war for telecommunications dollars. The steady navigation away from conventional desktop and laptop computing and into smartphone and tablet devices will slowly erode the social media business model.
According to Flurry Analytics, "the growing chasm between mobile app usage and web consumption will only be exacerbated by mobile device purchases in 2012." In December 2011, this analytics firm estimated that U.S. web users spent 94 minutes per day running mobile applications, compared with 72 minutes of time web browsing through desktop computers. For its new shareholders, Facebook may already be on the road to zero, before the party has even started.
I am poolside, and will happily sit this one out. Thanks, but no thanks.
Disclosure: I am long AAPL.