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The Prodigious Teen Bubble

|Includes:Facebook (FB), GOOG, YELP

Those who are short Facebook (NASDAQ:FB) are clinging to two particular themes that warrant contemplation since the hopes and livelihood of short-sellers are resting heavily upon them:

1. "Facebook is a bubble." Those who try to convince us that Facebook is a bubble offer specious comparisons to the Internet bubble of the 1990s. There's a problem with this simplistic analysis. The comparison is deceptive because the bubble stocks of the 1990s were trading at over $200 billion market caps before they had legitimate business plans and ever even turned a profit.

Just because a stock's price rapidly increases does not make it a bubble. In fact, based upon the amount of unusual bubble rhetoric, the term "bubble" itself as applied to Facebook may prove to be in a bubble. Here's why:

Recent performance suggests that Facebook's IPO price might have actually been fair. Just because Facebook under a cloud of uncertainty, and skepticism fell below $20 last year, doesn't mean that the low level ever reflected intrinsic value. It is easy to contend it has "run too far to fast" if one bases the stock price increase from the all-time low of $17.55 - instead of the IPO price. However, if the IPO price was right after all of the dumping on Zuckerberg, the increase from the IPO puts it at a reasonable price appreciation of approximately 31% in over a one-year period.

What is happening to Facebook's stock price may be more comparable to what happened with Google (GOOG) which came public (a few years after the Internet bubble). Like Google, Facebook is experiencing rapid growth in revenue commensurate with the rapid growth of share price. Investors used many of the same platitudes about Google being in a bubble, especially since over 96% of their revenue came from advertising and a substantial portion to this day still does (91% but shrinking).

The advertising market is quickly transforming due to growing mobile usage as the statistics below suggest.

  • 91% of all people on earth have a mobile phone.
  • 56% of people own a smart phone.
  • 50% of mobile phone users, use mobile as their primary Internet source.
  • 80% of time on mobile is spent inside apps.
  • 72% of tablet owners purchase online from their tablets each week.

One can find Facebook at No. 8 in the top 10 most downloaded apps of 2013, which isn't too shabby, but the statistic that is most important is Facebook's No. 2 spot on the Top 10 Most Frequently USED Applications of 2013:
(See Chart

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Facebook can afford not to be the "most frequently downloaded app" because once you download it, all you need are updates from time to time. However, Facebook's app came in second only to Google Maps with 44% of global smartphone users having used the app in the past month. That is as good as being No, 1 in ways because I know as a Google Maps user, when I use Google maps, I am not looking at anything except for directions, and I am impervious to ads if there are any around the map. It is the quality of the usage that sets Facebook apart.

Facebook is in a commanding position in mobile and the stock price may warrant the growth of the past year. I have no problem with Google trading at a valuation of approximately $373 billion despite still deriving over 90% of revenue from ads. By the same token, I believe Facebook is special, unprecedented and will for reasons outlined here be in the same category as Google over the next couple of years as they monetize.

At this point for investors, subscriber growth would be good to see, but they have already achieved dominance. The growth story now and for the future is the growth in the number of different ways that Facebook can monetize its extraordinary user base. Google's search has strengths that Facebook doesn't have and Facebook has strengths that Google doesn't have, primarily with the ever-growing mobile usage. Google has more to lose and recent quarterly reports demonstrate that Facebook's ad revenue is growing at Google's expense since Facebook is more competitive in mobile thus far. As I pointed out in a column in quarter two, Facebook and Yelp (YELP), two companies very strong in mobile, have seen growth that was almost identical to the number by which Google's ad revenue shrunk during that same quarter.

Theme #2. "Facebook will go the way of MySpace if teens continue to migrate." My how things have changed since I was a teen in the 1980s! The media and Wall Street didn't act like we were the center of the universe and pander to us in this way. As ubiquitous as that MySpace contention is (126 million returns on Google) - it is deeply flawed. It seems those short the shares cling to that hope. MySpace was more of a teen fad but unlike Facebook, most adults didn't embrace it. From what I observed as an adult in my 30s during the peak of MySpace was that many adults I knew were using far more than MySpace, which Facebook later rendered obsolete.

Adults did not follow teens into MySpace, but they did later migrate to Facebook. That is because contrary to the popular delusions, teenagers are not the oracles of civilization to which we all look for guidance. Teens are generally impetuous and temporary in nature as well as biology. They exist as teens for a mere seven years and by age 20 they have entirely new friends and colleagues. Their impulses will prove to have a diminutive impact on Facebook long term (if any at all).

The teen narrative as it pertains specifically to Facebook is silly to me because of the degree to which the media have latched on to it and the false correlation they draw between teenagers' and adults' decisions on social media preferences!

The best way to marginalize this teen narrative is to contemplate the reality of the social life-cycle for most humans. Teens for at least the past century tend to move on with their lives after high school, resulting in a substantial turnover of friends, whether they go on to college or go straight into the workforce.

According to "Seven years from now, a new study reports, your friend group will probably look entirely different, even though it'll still be the same size. Utrecht University sociologist Gerald Mollenhorst surveyed 604 people about their friends and again seven years later, and found that only 48 percent of people's original friends were still part of their network after that time period."

That study will come as no surprise to adults reading this, and that is only a seven-year study. After college, no longer teens, these young adults move on to the professional world, often resulting in another major turnover of friendships. By this time they notice, their lives seem to be accelerating at a rapid pace and their 20s are gone before they can blink.

Parents often go through a period where they seemingly "lose" their children. They suddenly want to be dropped off a few blocks from school so as not to been seen with mom and dad. Do parents then conclude their children are going to distance themselves forever? So maybe Facebook "loses them" for a brief time as well. That generally passes. The bottom line is, teens are generally impressionable and unpredictable.

Teens are also generally without disposable income. With a growing number of adults taking fast-food jobs in this "recovery, teen unemployment is still at record highs, over 30% this past Summer. Facebook isn't running a dollar store or a body piercing shop. Facebook can make a few bucks running ads toward teens but most their money is not dependent upon this very temporal demographic. The teens go wayward like prodigal children but they will be back in a several years when they are most relevant to advertisers.

They may slow down their Facebook usage but that doesn't mean they forever "check out."

The longer these people who were once "teens" live and the more they mature, the more prone they are to desire reunions and re-connections with the vast number of friends they accumulated through life. Where will they go to do that? Do they suddenly look up the phone numbers for people with whom they have lost touch, haven't spoken a word for 10 to 20 years and then dial them up out of the blue? No, they go to the place that has long established critical mass. They go to the place where over half of the U.S. population and 30% of earth's population can be contacted in a subtle manner within a couple of minutes.

Those falling for the wishful notions of short-sellers have not learned from the past and greatly underestimate the strength that critical mass delivers. Facebook is not just a web application; it has become a way of life. Some users, myself included, do not use it as much as when they first began with the service. However, the habit has been greater solidified nevertheless. Years after the novelty aspect wears off, the user has a better grasp on where Facebook fits into their life. To many it becomes an extension of their lives.

The platitude about Facebook "going MySpace" on us requires mass-quitting. Quitting usage is not simple. Extricating Facebook would be like throwing one's diary, journal and family albums away. Because they achieved dominance so early, a billion plus people have years of memories, photographs stored there in sequence and they are intertwined with those of their families and friends.

Millions of people, myself included, have had family and/or loved ones in their network of "friends" list who have passed away in recent years, with their accounts memorialized and woven together with their friends and family like a virtual tapestry. How difficult would it be to walk away from that? You may stop using it for a while but how many are going to close and delete those years of communication and sharing with family and friends?

As Facebook has matured and the "thrill" of something new has gone, it has transitioned into a regular routine like waking up and reading the morning paper. It is for many the preferred means of communication, replacing the telephone or at least greatly minimizing the amount of time spent on the phone.

Facebook reported extraordinary results in the third quarter. The bears succeeded temporarily in quelling the celebration by isolating a casual remark from CEO Mark Zuckerberg regarding teen usage slipping. What was rarely emphasized by the media and bloggers is the fact that the property to which the capricious teens had migrated, instagram, is also owned by Facebook. The shares were eventually rewarded by reaching new all-time highs weeks later but if there's one lesson from this it might be that Zuckerberg (who was never thrilled about going public) could try to be a bit more circumspect and put such statements into proper context during conference calls. He probably didn't anticipate the degree to which the media and short-seller would dramatize the remark. Although, a part of me respects him for not being prone to pandering.

Nevertheless, amassing wealth takes courage and those who sold in a panic will regret doing so. Those who are shorting with little more than platitudes about teenagers in their arsenal are going to end up in a great deal of pain. To give that much credence to people who will be living in different geographical locations and have almost entirely different friends and associates in 7 years - is not sound analysis.

Facebook is not depending on that impoverished demographic for their revenue and it is especially weak when you consider that the short-sellers incessantly propounding the narrative act as if it all happens in a vacuum and assumes that these kids are all deleting their accounts and will never come back.

Disclosure: I am long FB, .

Stocks: FB, GOOG, YELP