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  • Facebook: In Desperate Need For A Change

    By JinBae Kim

    Facebook (NASDAQ:FB) has 901 million users in the world and accounted for 14.6 percent of all Web traffic in 2011. The first thing I do when I wake up in the morning is check Facebook and the last thing I do before I sleep is check Facebook. Facebook is a great social networking website, but can it be a successful company?

    Facebook's main problem is its existing revenue model, which heavily relies on advertising. In 2011, advertising generated 85 percent of Facebook's overall revenue of $3.71 billion. This year, $872 million of its $1.06 billion revenue came from advertising. Facebook's overdependence on advertisement for revenue is dangerous for two main reasons. First, it has yet to find an efficient advertising model. Second, Facebook needs to find a way to apply the advertising model to mobiles.

    Facebook needs to find a more efficient way of advertising on their website without damaging the Facebook experience for its users. Four out of five Facebook users have never bought a product or service advertised on the site, according to a recent Reuters/Ipsos online poll. According to a eMarketer's recent study, Facebook was very weak in converting leads into sales. eMarketer deduced that email or direct-mail marketing even has a higher converting rate than Facebook advertisements. The problem lies in the characteristics of the users. Facebook users have no intention of looking at advertisements when they log in. Users are so preoccupied with their own photos and statuses, they have no time to look at irrelevant advertisements that take up a very small part of the page. Therefore it is difficult to even label these 901 million users as leads. This is why GM, a top 5 internet advertisers according to KantarMedia, pulled out from Facebook advertising.

    Net US Online Display Ad Revenues at Top 5 Ad-Selling Companies, 2011-2014 (billions)

    As we can see from the chart above, although Facebook is the current leader in US Online Display Ad Revenues, it will lose its position in the market to Google by 2013. For a company that relies heavily on advertising for revenue, their advertising model is inefficient and weak. Facebook is still an amazing social networking site because its advertisements do not hurt the user experience. But its about time Facebook realize that it is mainly an advertising site. It needs to find a better balance between advertising and user experience.

    Many investors and analysts have already voiced their concern about this second issue: the mobiles. With rising mobile electronics, particularly smartphones and tablets, mobility is becoming very important, especially to the younger generations. According to comScore, users spend more time with mobile versions of Facebook than the browser version. Facebook's applications on mobiles are average at best; the iPhone app has a two-star rating on iTunes and the Android app has had its share of user rage. These underdeveloped mobile applications affect the user experience of Facebook and also denies the advertising opportunity that can be gained from the traditional browser.

    What does Facebook need to do in order to sustain its dominance in the social network arena and also keep the new investors happy?

    If I had the answer to this problem, I would be at Zuckerberg's office trying to bargain for these overpriced Facebook stocks instead of writing this article. But I do know that Facebook needs a change, just as Zuckerberg knows it. Facebook has been making some changes in the past few months. Primarily, it has been seeking out heavy acquisitions to expand the company. Among the many acquisitions, the $1 billion acquisition of the mobile photo sharing company, Instagram stands out. Other acquisitions include Tagtile (mobile customer loyalty service), Glancee (a networking mobile application), and Karma (gift-giving mobile application). After gaining a whooping amount of capital from the IPO, I fully expect Facebook to continue acquiring social networking companies on the mobile platforms. These acquisitions are great changes to Facebook's existing operations. Facebook increases its social networking force in the mobile platform, converting a potential threat into a opportunity.

    Unfortunately, not all changes have been positive. At an attempt to change its revenue model and digress from the overdependence on advertising, Facebook has started to employ a new feature called "Highlight." For those of you who did not know, only 12% of your friends see your average status updates. This new feature, which is being tested in Australia now, allows you to pay a few dollars to show your posts to a wider audience. If Facebook decide to add this feature, your News Feed will be filled with posts from people that simply have more pocket money than others. You will lose control over the information you see on Facebook.

    This futile attempt to find another revenue source shows the desperation that Facebook is facing. At least, Zuckerberg understands the situation and is trying hard to make a change. I am a devoted Facebook user and I love Facebook for all that it is. But if Facebook does employ this feature worldwide - which I highly doubt since I cannot imagine that it got any positive feedback - I will not only be upset but offended.

    Facebook needs a change, but a good one. It should not be too hasty in making changes because one bad decision like "Highlight" will put Facebook next to Myspace, if anyone still remembers what Myspace is. I would run away from this stock until I can see a real commitment to a new advertising model. Even at $26, Facebook is trading at ridiculous multiples without any stable revenue source and a difficult future. There is nowhere else to go but down from this price level.

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

    Tags: FB, short-ideas
    Jun 08 12:46 AM | Link | 3 Comments
  • Apple Has No Cap

    By JinBae Kim

    It amazes me how far Apple's stock (NASDAQ:AAPL) has grown in the past few years. In April 2010, the stock was trading around the $240 mark. Now it is teetering between the $500 and $600 mark. To be able to grow more than %100 at this size is remarkable. It is hard to believe but there seems to be no reasonable cap to Apple's stock.

    So what is so special about Apple? Constant innovation. As we can see from the chart above, the stock's growth has been powered by notable product releases, each with significant amount of demand (the new iPad sold 3 million units in its first weekend). Apple's ability to innovate is unmatched, and the iPhone and iPad are the perfect embodiments of its innovation.

    The iPhone and iPad have already come a long way since its original versions, and we are at the brink of the iPhone 5 and the iOS 6, as it is predicted to be showcased at Apple's Worldwide Developer Event (WWDC 2012) in early June. The buzz for these new upgrades is immense. There have been numerous rumors regarding liquid metal features, larger and high-resolution display, and 3D Mapping (crowd-sourced open source projects have the potential for reporting increases in traffic, police, road-work and much more). Multiple tech blogs are tracking down Apple's every move.


    I am not going to go into every specifics of the new iPhone, but I can tell you that the iPhone 5 and iOS 6 is going to capture the demand of the consumers.

    Apple TV, on the other hand, is supposed to have a different take on traditional TVs. It is not going to be easy making an impact on this market, but it is possible. With the different services that Apple products offer, including the many existing applications and FaceTime, Apple TV could be the first "non-TV TV". Forrester's analyst James McQuivey also believes that portability could be a differentiating factor for Apple. The Apple TV still has a long way to go but it has the potential to compete with existing leaders like Samsung and Sony.

    On top of all this, Apple is also expected to reveal the latest redesign of its MacBook Pro laptops. MacBook Pro has never had a major market share, but these new products are expected to be thin and equipped with Apple's Retina Display that is used on the iPhone and iPad.

    With these new upgrades and new products in mind, Apple's senior VP of industrial design, Jonathan Ive, recently revealed the importance of a "new project" that he is working on. Ive claims that this new project is Apple's best project. He is probably referring to any of the above upgrades and new products I mentioned, but it says a lot when Apple's senior VP says that a new project "feels like the most important and the best work [they have] done."

    It is not ludicrous to think that not only will Apple continue to invent new products and improve its existing ones but the consumers are going to love these new products and improvements.

    Apple is more than just a hardware company. Apple is not Motorola, Nokia or RIM. Apple has come up with various accessories to its hardware products in order to capture the consumers. Apple doesn't make much profit from iTunes, iCloud, the App store, or the constantly updated iOS but the ecosystem of these different services maintains the high demand for its products. This ecosystem is the backbone of their hardware and it will continue to attract consumers to its new products.

    With or without the great Steve Jobs, Apple's future is solid. Yet Apple's PE multiple is 13.7, which is much lower than its historical average ratio. Despite being a leader in the market and in innovation, Apple has an average PE multiple compared to others in the technology sector.

    Apple stock is not going to be capped at $600. Recently I saw Apple's stock rise all the way to $640 then decline to the low $500s. Despite these fluctuations in prices, Apple is still undervalued. Current prices do not give justice to Apple's future. Apple will pass Exxon as the top earning stock by the end of this year. And it is very possible that Apple will reach $1000 dollars in the future.

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

    Tags: AAPL, long-ideas
    Jun 05 3:33 PM | Link | Comment!
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