How Mark Zuckerberg Duped The Market

| About: Facebook (FB)

During Mark Zuckerberg's interview on September 11th, Facebook (NASDAQ:FB) shares rallied almost 3%. I don't particularly blame investors for getting excited at his remarks considering we may have witnessed what was his most confident public appearance yet. He was quick to respond to the questions and his answers were fulfilling for shareholders. He was smart not to give shareholders specific guidance about Facebook's performance for the next few quarters. Instead, he resorted to his long term outlook to calm the markets.

While the market may have experienced a knee-jerk rally to his interview, I expect investors will wise up and reconsider. I'll go as far as to say we'll see Facebook hit new lows by the end of the week. The point of this article is not to speculate on short term price fluctuations, however. I'm more interested in the performance over the next few years (2-5 years). I recommend watching the highlights from the interview.

It's not hard to see Facebook is putting all its chips on mobile at this point and rightfully so. The user base of mobile is much larger than the user base of desktop computers with internet connections will ever be. On the other hand, Zuckerberg said during the interview that the number of users using Facebook through their mobile browser is more than those using the Android and iOS apps combined. This means that even when Facebook does figure out how to put ads into its apps, a large portion of mobile users will remain ad free. Also, app users may even revert back to mobile browsers if the ads become a nuisance (which, on a screen only inches across, is expected).

Clearly, the mobile side of Facebook needs some more work before it can be properly monetized. Let's consider the desktop, then, to maintain current revenue streams. Facebook's user growth year over year is falling dramatically. According to comScore, it went from a 57% increase in 2010, to a 23% increase in 2011 and only 16% to date for 2012. This isn't a huge surprise. After all, with 950 million users, Facebook may be reaching a saturation point that simply can't be crossed. This isn't even the worst part, however. Even the users that are already on Facebook are cutting back on the time they spend networking with friends. The growth of minutes spent on Facebook by all users from 2009 to 2010 was up 183%, while 2010 to 2011 was up only 45%. This year, it has increased only 21%.

Facebook simply cannot expect to grow at a reasonable rate any longer by relying on increasing number of users or increasing time spent on the website. Their only real option is to monetize in a completely different way. This may be the reason a lot of investors expected Facebook to invest in a mobile device of its own rather than piggybacking on the iOS and Android. This idea has been shot down several times over the past year by multiple Facebook executives. Even Mark Zuckerberg made it clear during his interview Tuesday that Facebook is not working on a hardware device. He went as far as to say that all the tech companies seem to be doing hardware now, including Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG), and Apple (NASDAQ:AAPL). He went as far as to say that it simply "won't move the needle" for Facebook.

All this and the marketplace is taking Zuck's word that Facebook will do well in the long term? If long-term for you is ten or twelve years, maybe. It's difficult to predict what a young company is capable of producing with any reasonable accuracy in that timeframe. For most investors, two to five years is more reasonable. Since Facebook seems to have no breakthrough products in the pipeline, it's difficult to see this stock doing well.

Investors have to remember the premium that Facebook is trading for right now. It's still trading at over 45 times forward earnings according to MSN Money. Google, on the other hand trades at only 16 times forward earnings (keep in mind Google has a proven business model that is still growing). Apple is even cheaper at only 12 times forward earnings!

Facebook, in my opinion is still overpriced and I'd give it a sell until we see a breakthrough product or the price drops below $12. Like always, it's important to do your own research and form your own conclusions. While I stand by my analysis completely, it's possible that Facebook has developed a business model like that of Apple and new developments are kept secret until they are ready to be released.

Disclosure: I 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.