Facebook (FB) rose above $20 after its CEO, Mark Zuckerberg, spoke at a TechCrunch conference in San Francisco earlier this month. Zuckerberg asked investors to be patient, pointing to the growth potential for its projects on the social networking site. The new products and functions were centered on two developments: (1) search and (2) retooling of advertising products. Morale was boosted at the firm after shares rose, and the recent strong performance will encourage existing investors to double down, which would lower the average purchase price. A rise in the Nasdaq index also helped Facebook shares. The Nasdaq rally was led by Apple (AAPL), after the company announced the iPhone 5. A refresh in Apple's smartphone included an updated Facebook application will benefit the social networking company. Facebook shares will also benefit when it joins the Nasdaq Q-50 Index.
Sentiment changed when Barron's published a $15 target price for Facebook that took away Facebook's share rebound. Barron's valued Facebook at 24 times 2013 earnings, and 6 times 2013 revenue.
Facebook is still a stock to sell. The reasons are that: (1) search pulls the company away from its core competency, (2) mobile advertising remains a challenge, (3) insider sales will add negative pressure for shares until 2013, and (4) competitive threats will grow.
Enhancing search on the site is expected by investors to help Facebook compete for advertising dollars against search engine leader Google, Inc. (GOOG). Zuckerberg provided little detail on how search will be designed to be more effective than the current "sponsored story" advertising model. This is a red flag. Microsoft (MSFT) Bing is currently used to power the current search engine. Outside of Facebook Bing, in partnership with Yahoo (YHOO), continues to struggle to take market share from Google.
As the global economy weakens, advertising budgets will remain constrained, which could hurt Facebook. During the last recession in 2008/9, Google improved its profit margin simply by making slight modifications to the way its ad words were displayed. Facebook does not have the same luxury: it must first design an effective, ad-promotable search algorithm from scratch.
Yahoo is aiming to overhaul its search and email. Yahoo's CEO, Marissa Mayer, set a goal for the company to grow users and usage using personalization. If successful, users could reduce their time spent on Facebook, visiting Yahoo instead.
(2) Mobile Advertising
Facebook Exchange is an advertising system that works by targeting ads using a combination of marketer and Facebook data. An ad network, currently in test phase, is supposed to compete with Google's AdSense network. Google's expertise in mobile advertising was supported partly by the explosive growth of the Android user-base. When Facebook launches mobile advertising, it must do it in a way that does not disrupt the user-experience, an experience that is currently ad-free.
(3) Insider Sales
Investor confidence was restored when Zuckerberg said he will not sell his shares for at least a year. Zuckerberg owns 444 million shares, and has an option to issue an additional 60 million shares. This implies that the 60 million shares eligible for sale on November 14 2012 will not be sold on the open market. Instead of 1.32 billion shares free to be traded, the lock-up will end for 1.26 billion shares instead.
Zuckerberg is already a billionaire from Facebook's IPO. He sold 30.2 million shares when the company became public May 18, and made a gain of $1.1 billion.
The insider sale schedule was covered in this article. The sale will continue to hurt shares through to 2013.
Competition for Facebook is growing exponentially. Google+, not viewed as a threat to Facebook when it launched a year ago, now has 100 million active users each month, and 400 million users in total. Vic Gundotra, the Senior Vice-President of Engineering for Google, said that:
This week we also hit an important milestone-over 400,000,000 people have upgraded to Google+. It was only a year ago that we opened public sign-up, and we couldn't have imagined that so many people would join in just 12 months. While Google+ is all about creating a better experience across Google, it's also a destination. And here too, I'm happy to report that we have just crossed 100,000,000 monthly active users on Google+ (plus.google.com and mobile app).
Google appears to have been successful in getting its email users to also sign up for Google+ services.
Former social media giant MySpace, once owned by News Corp.'s (NWS), released a video previewing an entirely new social media experience. Users have profile pages with a large image that fills the entire page, and may even able to register using their twitter or Facebook account. A successful re-launch of MySpace will threaten to lower Facebook's count of monthly average users.
Barron's may have taken away the momentum in Facebook's shares, but the lockup expiry of 249 million shares on October 15, and 1.26 billion shares on November 14 remain negative events. Investors should continue to stay away from Facebook.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.