Just about every reader of this article probably has a Facebook (FB) page. Maybe you have two or three pages. I personally have two pages. One is for sharing with my friends and family, as well as strangers to playing games with on Zynga (ZNGA). The other is a page strictly for Regarded Solutions, a page on which links to our Seeking Alpha articles are placed. The intention was to cast a wider net for regular folks who have never ventured over here, to find Seeking Alpha and Regarded Solutions on a really cool Facebook page.
I also wanted to see how Facebook works its advertising for pages like mine. In that way, I can formulate some sort of idea of how it might be effective for other businesses, and for Facebook itself to be able to monetize the site in the long term. Thus far, I have been completely disappointed. The site charges the standard per-click amount for folks who "like" a page. Of course, only a certain percentage of those "likes" would actually turn into Seeking Alpha readers, which of course I already accepted. The issue was who my ads were "sent" to and why.
I put out a very simple ad. It simply stated that the page offered links to free articles right here on Seeking Alpha for investors. My metrics were simple as well: over 35, male or female, an interest in personal finance, investing, and retirement strategies. The bottom line for me was that the ad was "sent" to college students, other sites looking for "likes," some folks who did not care one bit, as well as some of my demographics. If I am a microcosm of other real-life experiences, then Facebook is in more trouble than one could imagine.
Now, don't get me wrong -- I am not griping about my own situation. I am just pointing out what I have seen, and what my opinion is of the way Facebook is going about its business.
The key to its potential success is to monetize the site. Advertising and Zynga have been the drivers of the revenues that Facebook has enjoyed. We are all too familiar with the Zynga issues and its share price. Now we also have some up close and personal experiences, which could easily be analyzed along with the big picture.
Is it any wonder that shares of Facebook have been hammered?
A picture (OK, a chart) is worth a thousand words. The stock price has been cut in half.
Basic Fundamentals
- $4.3 billion in revenue stemming from advertising and Zynga
- $10 billion in cash
- $1.8 billion in operating cash flow and $700 million in debt
- A very high share-price-to-book value at 3.19
- A trailing P/E of 66 and a forward P/E of 31
The share price is still to high, even at half of the original IPO price. In this recent article, Henry Blodgett stated the following:
Facebook's stock price is still expensive relative to the current expected earnings growth for the company. At $20, the stock is trading at 31 times next year's projected earnings per share of $0.65. Apple and Google, for comparison, trade at less than 15 times. Facebook could easily trade at 20-30 times next year's earnings and still have a nice valuation. So the stock could go considerably lower.
I suppose the question is: How low can this stock go? Obviously nobody has that answer, and Facebook could begin to make some smart moves that would enhance both revenues and profits. But there are so many issues going on I am not so sure that even matters right now.
Facebook and Zuckerberg Continue to Face Major Problems
My little advertising "test" could never begin to show the whole picture. It's just a tiny snippet that could offer a clue. That said, Facebook, and CEO Mark Zuckerberg, face more issues than you can shake a stick at. These issues could impact the share price for who knows how long to come.
As Blodgett also stated:
The stock is tanking because investors are radically revising (downward) their outlook for Facebook's future financial performance and earnings. The range of 'fair values' for Facebook stock is unfortunately extremely wide, and investors are examining Facebook's recent results and concluding that the fair value is much lower than they thought three months ago.
The market is 're-assessing' Facebook because of three things: 1) the rate at which revenue growth is decelerating, 2) the impact of the shift to mobile, and 3) the decline of the company's profit margin based on the decision to invest more for future growth.
That about sums up the bottom line sentiment, but there are even more issues that need to be addressed. Some investors are calling for Zuckerberg to step down from running the everyday business. Some major investors could be looking for a more experienced manager to navigate the overall business of Facebook, and to take the share price to where it had been expected to go.
Read what this article had to say:
There is a growing sense that Mark Zuckerberg, talented though he may be, is in over his hoodie as CEO of a multibillion-dollar public company," said Sam Hamadeh, head of research firm PrivCo.
While in many cases a company founder can, and does, grow into the job, things are happening so quickly that there is precious little time here for Zuckerberg to do that.
I personally do not believe that changing the CEO would make that much difference. At least not for a long, long time.
In the same article, Barry Ritholtz, head of research firm Fusion IQ, was quoted as saying:
This was the most anticipated IPO in many years and it was like an exploding cigar. Every investor thought they were about to become wealthy beyond their wildest dreams, and they had this blow up in their face.
The danger, Ritholtz said, is the drooping stock price could tag the company itself with a "stink of failure" that could make advertisers "less willing to use Facebook." In my opinion, Ritholtz is dead on. As a matter of fact, that "stink of failure" is already happening.
I smell it myself!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
