As many watchers of the recent Presidential debate may have seen on their TV's, "Tweets" from the popular social media site Twitter.com appeared live on their screens. Twitter is stealing the hearts and attention of the younger social media users from its "old fashioned" rival Facebook (FB) in the most visible venue: broadcast TV. Perhaps this is why the announcement of Facebook passing the 1 billion user mark did little to help its stock price.
In addition, Facebook has been out on a massive media blitz trying to rationalize its business plan and help bolster its stock. It seems that Facebook is announcing new revenue generating initiatives daily. Here is a list of the last eight official company announcements from its newsroom page (which we had to Google to locate):
October 04, 2012
October 04, 2012
October 03, 2012
October 02, 2012
October 01, 2012
October 01, 2012
September 30, 2012
September 27, 2012
It seems clear to us that Facebook is trying a "throw spaghetti at the wall" approach for its generating revenue quandary to convince new investors to buy the stock. It appears not to be working at a critical time with the coming "Float Bloat" which has been well covered throughout the media. In a recent Bloomberg article, Chairman Mark Zuckerberg is quoted saying, "We make more mistakes than other companies do, you can't have everything…." In fact the media blitz has included COO Sheryl Sandberg and board member Marc Andreessen being interviewed by talk show host Charlie Rose. Is all this exposure helping or hurting Facebook? The stock is trading in a narrow range with plenty of volume and lots of presumed buyers and sellers every day. We have opined in the past that much of this volume is machine to machine ECN rebate-induced high frequency trading.
When a child is losing a game, it is common for them to change the rules in an effort to reverse their fortune. It seems that FB's recent strategy to change the way advertisers should pay them is to dispute the traditional clicks method value proposition. At a recent IAB MIXX advertising convention in New York, Facebook's Brad Smallwood said, "99 percent of sales generated from online branding ad campaigns were from people that saw, but did not interact with, ads -- proof that it is the delivery of the marketing message to the right consumer, not the click, that creates real value for brand advertisers," in his effort to convince advertisers to change the metrics for ad placement compensation. We think that this is telegraphing that Facebook is going to miss the earnings predicted by analysts. This was foreshadowed by Facebook focused social gaming company Zynga (ZNGA). Its stock trading was temporarily halted in extended-hours trading because it was reported it would announce a loss for Q3 2012. In sympathy, FB fell as well in after-hours trading.
In addition, privacy issues continue to mount in Facebook's rules changing effort. This ABC clip describes public perception. This effort is also outlined in this recent Forbes article which actually points out that Yahoo (YHOO) and Microsoft (MSFT) are also practicing similar techniques. Here is our point: users have the ability, albeit one not well known yet, to opt out of this practice by blocking these cookies. It's our opinion that advertisers will engage users directly and compensate them for their personal data and desires.
Surely, Facebook's public/investor relations department is working overtime these days. The most likely catalyst stirring all this media activity is the onslaught of shares coming off of IPO lock-up agreements. These shares, some 1.186 billion, of which 234 million will hit the market starting Monday October 29th. Some analysts have argued that many will not be sold at the current FB share price. While this may be true, there are many employees who have counted on these shares as compensation and need the money to live. Many of these shares were given as compensation is viewed as necessary cash by employees. The price of the stock has no bearing on whether employees,insiders or affiliates will sell it or not. If they need the cash and they will sell it. This is not everyone, but it can be many. Current holders or those considering purchasing FB shares should realize that the imminent release of shares IS an "oncoming train" for them in terms of downward pressure resulting from more available supply.
One day, Facebook may become an easily understood business with predictable income streams. But that will not happen in the next three months and therefore it's best to wait to purchase shares next year. If you know an item is going "on sale" in the next three months, why would you pay full price for it today? And for aggressive investors, shorting shares at these prices might make sense.