Facebook Needs A Clear Business Plan

Aug.10.12 | About: Facebook (FB)

Ever since Facebook (NASDAQ:FB) went public, many analysts have attempted to predict a fair entry point for the company. Some said "buy Facebook when it falls to $30" others said "buy Facebook when it falls to $25" and some other said "buy Facebook when it falls to $20." It is really difficult to find the bottom and/or fair entry point for Facebook. Instead of giving a number, I'd rather say "buy Facebook when it has a clear and feasible business plan that will enable the company to see strong and sustainable growth and cash flow." So far, Facebook has yet to convince investors that it can earn money and grow its earnings over a long period of time. Many investors are very skeptical of the company.

Because the company's business plan and chances of success are so vague, the analysts have a wide range of price targets for the company. The analyst price targets for Facebook range from $23 to $45, indicating a lot of uncertainty. If many analysts can't agree on a fair price of a company, I would stay away from buying or shorting it because the stock could go anywhere. As much as the company's earnings forecasts go, again, there is a huge variance based on the uncertainty around the company.

The analysts think that Facebook will earn between 5 cents and 52 cents in 2012, between 17 and 68 cents in 2013 and between 23 cents and $1.26 in 2014. In this quarter, the company is expected to earn between 4 cents and 14 cents and in the next quarter, it is expected to earn between 5 cents and 16 cents. Usually "analyst consensus" is measured by averaging all estimates; however it is very difficult to talk about any type of analyst consensus in terms of Facebook. The analysts are all over the place with this company as it doesn't have a clear business plan.

For the last several months, trading stocks of Facebook has been considered a gamble by many. It looks like the volatile price movements in its stock shares inspired Facebook to initiate a new business venture where the company will attempt to become one of the major online casinos in the world. You didn't read it wrong, Facebook will let its (British) users gamble online using real money. This will surely be interesting.

To make the matters clear, I should add that Facebook will not be running a gambling business; rather it will allow online gambling companies to operate on its "territory" and collect commissions. According to the news, the users will be able to use real money to play Bingo and 30% of the revenue will be collected by Facebook. This will surely increase the company's revenues, however the cost might be the very image of the company in front of public's eyes. The first company to run gambling apps on Facebook is Gamesys and the company also has plans to add virtual slot machines in its app.

The app will be only open to those over the age of 18. The app will have to be careful in filtering out those under age of 18 if it wants to avoid legal troubles. The company will also have to use geo-location technology to make sure that the gamblers are actually residents of the U.K. In many countries, online gambling is either strictly restricted or completely illegal. Furthermore, the company will have to run identity checks to make sure the users are who they say they are. This may create issues regarding privacy. Of course, the legal troubles may somehow spread from Gamesys to Facebook if things go awry.

Apparently, Facebook doesn't have any plans for allowing users to gamble in other countries or through other apps at the moment. If the company's venture with Gamesys turns out to be successful, the management of the company might change its mind and allow online gambling in more countries.

Some investors will welcome the news while others will see this as a sign of desperation in the company. If this is mainly seen as a sign of desperation, the investors might start thinking that the company is running out of revenue growth and other ideas. Is Facebook a buy? No. Is Facebook a sell? No. Facebook is pretty much a gamble at this time.

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