Social Boom Busted But Facebook Looks Beyond

Jul.27.12 | About: Facebook (FB)

Every new niche has the same pattern. There's a boom, a bust, and then we look beyond.

The social boom busted when Facebook (FB) went public. Now, with the company trading at $23/share, and the rest of the space approaching bankruptcy, it's time to look beyond.

Is anything in the social space worth buying, and at what price?

All the Monday morning quarterbacks are playing "I told you so" with Facebook today, one even saying CEO Mark Zuckerberg made a mistake having his IPO priced aggressively.

That's crazy. When a company sells its own shares, its bankers have a duty to get the most they can for them. And they had created a lot of demand. Any resulting "pop" is money left on the table - fun for traders, but gone to the selling company.

Still, Facebook is a stock that has fallen and can't seem to get up. Even reasonable numbers - revenues were actually ahead of estimates - couldn't keep the shares from tanking this morning.

After all, the bears say, lock-ups expire in August. Given the stock's poor history, everyone will be heading toward the exits. The company is spinning in and going to disappear, say the bears.

Turns out the amateur experts here at Seeking Alpha can teach the pros a thing or two. Jiang Zhang is right about the near-term uncertainty. But Robert Broens is also right that if Facebook can just increase Average Revenue Per User, or ARPU, it's a buy.

Sterne Agee calls Facebook a core technology holding, and is bringing down its own numbers only slightly, expecting that Premium Ads and Sponsored Stories will lift results next year. Maybe. I would look at how the stock is doing in September and, if the PE starts getting near that of a proven cloud leader like VMware (VMW), about 52 by our most recent estimates, I'd start nibbling. Facebook will survive.

I'm not nearly so certain about the other social leader, LinkedIn (LNKD). The stock has remained stuck in the stratosphere - its current PE is over 100 - and even if Value Seeker is right that the company is here to stay, I would also agree with Brennan Basnicki that it could be another Netflix (NFLX).

LinkedIn management was smart to go public early in the cycle. This provided their early buyers with a fat return, and I think made them lazy. There are only 103 million shares outstanding - against 2.14 billion for Facebook - so there are few sellers to collapse the stock.

But there is a limit to what its business model can do. It is, in the end, a business-to-business business model, and b2b niches depending on human interaction are always going to be less scaled. I use LinkedIn - I'm regularly getting requests for connections from strangers which I tend to accept. But it is, in the end, mostly a free replacement for, with over half of its revenues coming from what are basically want ads.

The result is that quarterly growth is slowing. But profits are still elusive - $5 million on sales of $188 million? That's a PE that's begging for a short, and in time they'll get one.

If you're an active trader I'd look to get into Facebook in September and get out of LinkedIn while you can, or look to buy calls at lower prices. Once the boom has busted, look beyond.

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