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Jacob Steinberg
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I mainly focus on two sectors: technology and auto industry. I am long only and I like to take a conservative approach where I sell covered calls on the shares I hold in order to reduce my risks. Some of the stocks I follow closest are Nokia, Microsoft, Ford and Apple. I believe that being able... More
  • Facebook Rallies After Mark Zuckerberg's Comments 0 comments
    Sep 16, 2012 3:11 AM | about stocks: GOOG, FB

    In my last article about Facebook (NASDAQ:FB), I cautioned against both buying and shorting the company. Buying this company is risky as the company has a very high premium with limited growth opportunities, and shorting the company is just as risky because the Wall Street is notorious for picking sweethearts and making them rally for very little excuses. One such example is Amazon (NASDAQ:AMZN). Facebook isn't there yet, but it has the potential to get there with its P/E ratio above 100.

    After the stock plunged by more than 50% since the IPO, Mark Zuckerberg had to make a number of announcements to the investors to stop the sell-off. It looks like Mr. Zuckerberg's latest announcements are received very nicely by the investors of the company, and their panic seems to be diminishing. After the IPO, Facebook's management had been relatively quiet until Mr. Zuckerberg's announcements on Tuesday. This quietness, coupled with insider sell-offs added to the panic of the company's investors. While there are more than 1 billion Facebook shares with the potential to be dumped in the market in the next 6 months, no one knows how the stock will hold off during this period.

    Mr. Zuckerberg finally provided some good insight into the company's vision, strategy and future plans after a long period of silence. He also ended some of the speculations surrounding the company and its future. For example, he rejected the rumors that the company was planning to build its own mobile phones and compete with companies like Apple (NASDAQ:AAPL), Samsung and Nokia (NYSE:NOK). Apparently, the company has no plans to build its own phones anytime soon.

    Mr. Zuckerberg thinks that the company's lack of focus on mobile applications was its biggest mistake so far. The company was late to see the potential in the mobile devices as the users of Facebook were rapidly moving from computers to mobile devices. Until recently, the company's mobile applications were not very advanced and they needed a lot of improvement. The company still needs to figure out how to insert advertisements efficiently in small screens of mobile phones, but at least, now the company recognizes what it needs to do.

    In addition, the company will seek opportunities in the search engine area. If materializes, this move will make Facebook a direct competitor of companies like Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO). This is a market where Google dominates, and anyone who dares to compete with Google gets crashed. This will be a very tough road for Facebook, but the company has its own strengths, such as being the largest social network in the world. Facebook is one of the few places where someone can search and find their friends' favorite restaurants, cafes, bars, brand names and many more things.

    The CEO said a lot of hopeful things about the future of the company and asked for time from the investors. The investors viewed this positively and the company's stock price has been up by more than 10% since Mr. Zuckerberg gave his speech. One of the analysts covering the company said:

    "While none of his comments led us to change our financial model for the company, better understanding Zuckerberg's priorities, motivation, and general focus is a positive for investors."

    Mr. Zuckerberg also said that Facebook had a "social mission" and its first priority goal was to build better products rather than to make money. He said: "we don't build services to make money; we make money to build better services." This will sound great to the users of Facebook but many of the company's investors will not like to hear that. A private company can say it doesn't care about earning money; however, CEO of a public company might think twice before saying something like that. People invest their money in companies to see returns, and companies are there to make money. If a company has an "I don't care about making money" attitude, it could be better suited as a public company.

    I am not saying Mr. Zuckerberg is not a smart businessman. He is a very competent business person. He started this company with his bare hands, refused to sell it to people at many different stages and he grew it to a size no one thought it would get to. But now, he needs to realize that he is leading a public company and his actions, words and choices will receive response from thousands of people very quickly. Since the IPO, the investors of the company have been voting him down by selling their shares.

    Now what? Facebook still needs to find a good way to make money, particularly on mobile devices. If the company can figure this out, it will have a great future. If not, the investors will run out of patience sooner or later. At this point, I don't even care about Facebook's high P/E ratio anymore. All I care about is whether the company can find a feasible way to monetize its mobile phone applications or not. This is pretty much where the company's fate sits at.

    Disclosure: I am long NOK, AAPL, GOOG. 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.

    Themes: long-ideas Stocks: GOOG, FB
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