Seeking Alpha

Facebook slips; ITG data points to subdued Q1 numbers

  • ITG Research's checks suggest Facebook's (FB -1%) ad prices (on a cost per click basis) fell Q/Q in seasonally soft Q1, and that its revenue will be in-line or below consensus.
  • OTR Global reported last month its Facebook checks pointed to softening news feed and FBX Exchange ad spend due to rising prices; Facebook's ad prices rose 92% Y/Y on a CPM basis in Q4.
  • On the other hand, Facebook ad software provider Nanigans has said Q1 ad spend was stronger than expected following a slow start, and that it saw Facebook ad prices rise 10% Q/Q "across the board."
  • Facebook, which has seen its estimates rise following three quarters of blowout revenue figures, reports on April 23. Shares are down moderately while the Nasdaq trades up 0.5%.
Comments (46)
  • monfrere
    , contributor
    Comments (581) | Send Message
     
    What? You mean that adding people in Dirt-stan and tribes in Africa isn't causing a massive increase in advertising prices? Next you'll be claiming that $19B was too much to pay for Whatsapp!
    16 Apr 2014, 10:32 AM Reply Like
  • Deja Vu
    , contributor
    Comments (1398) | Send Message
     
    Don't insult the people in Dirtstan. As the quaff their herbalife shakes since obesity is a problem in the years when there is no famine, they tweet and facebook their latest 3D creations. When they fall ill they quaff the Achtar gel from Questcor. To manage their goats they use BIG DATA from Palantir and Tableau. They have replaced their bazaar with software from Salesforce.com. They too have decided they don't want fossil fuels and have decided to acquire zero emission Tesla bullock carts.

     

    I only wonder why they hate the USA when we have such fine companies selling them valuable products.
    16 Apr 2014, 10:48 AM Reply Like
  • leopardtrader
    , contributor
    Comments (1588) | Send Message
     
    You dont seem to have any clues about what is going on in the world. You will be amazed when you wake up.
    16 Apr 2014, 10:58 AM Reply Like
  • gwynfryn
    , contributor
    Comments (4707) | Send Message
     
    "Zero emission" "bullock carts"? Dream on!
    16 Apr 2014, 11:40 AM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    This, combined with the Priceline CEOs comments are setting up the correction for FB.

     

    I see a soft make or perhaps soft miss for Q1, then lower guidance coming.

     

    Followed by the "analysts" going tizzy and shifting their targets. Then FB drops to $45.
    16 Apr 2014, 10:58 AM Reply Like
  • Tomal
    , contributor
    Comments (1094) | Send Message
     
    lower guidance? Q1 is the lowest point in advertisement companies. Plus we had cold weather in US where businesses should logically spend lower in advertisement. Guidance will be higher now that weather phenomenon is gone. Then we have world's most watched event in June which is Football World Cup. Advertisements around the world will skyrocket at that time.
    16 Apr 2014, 12:04 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    Yes, lower guidance for Q2 even if they make Q1 estimates.

     

    Seasonal advertising is known, and should be priced in FB if it is valued on ad revenue.

     

    I think you ascribe far too much significance to cold weather. One could also argue that when people are stuck at home, they hop online and prop up online advertising figures.
    16 Apr 2014, 01:22 PM Reply Like
  • ddevaney
    , contributor
    Comments (226) | Send Message
     
    Come 24 Apr, you like the groundhog Phil will go back into hiding.
    16 Apr 2014, 08:19 PM Reply Like
  • tarheelboy
    , contributor
    Comments (218) | Send Message
     
    Facebook will have a superior quarter. Reporting on conjecture is not reporting. To put it another way, hearsay is not allowed in court. Another big day for ZUCK on April 23.
    16 Apr 2014, 11:01 AM Reply Like
  • ddevaney
    , contributor
    Comments (226) | Send Message
     
    Totally agree with you and we will no longer hear from Groundhog Phil Justin for a while. But his $45 mantra will never go away. Wonder why he has no shares.
    16 Apr 2014, 08:20 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    Superior to what? GM?

     

    Even I believe that.
    16 Apr 2014, 11:24 AM Reply Like
  • drpersky@drpersky.com
    , contributor
    Comments (124) | Send Message
     
    Like it or not, Facebook is the greatest form of mass media communication in the history of mankind. J, you would have been telling the early stockholders in AT&T that "there is no future in the telephone." Be well.

     

    Best,

     

    Doc
    17 Apr 2014, 12:02 AM Reply Like
  • PersianChris
    , contributor
    Comments (8) | Send Message
     
    Call Options ~ In for the Long. #NoBrainer
    16 Apr 2014, 11:28 AM Reply Like
  • jimofoakcreek
    , contributor
    Comments (8) | Send Message
     
    The bar has been set so high for FB that it must have a blowout quarter or it will tank. That's a tough spot for Zuck to be in.
    16 Apr 2014, 11:28 AM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    In a sense, FB is getting the AAPL treatment-- a victim of its own success. Because they did have such rapid growth, the market got ahead of that growth and now the expectations are just impossible to meet. That happened for AAPL at $700 a share. I think it happened to FB in Feb at $72.

     

    I see a Tantalus treament for FB where the full monetization of 1.2B users evades them more the further they reach.
    16 Apr 2014, 11:35 AM Reply Like
  • Scott Ryan
    , contributor
    Comments (317) | Send Message
     
    FB may get the Apple treatment but not until they have the Apple market cap. And they will, at least in regard to the latter.
    16 Apr 2014, 02:37 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    Scott Ryan-- do you have any idea how HUGE facebook would have to grow and for how long to approach AAPL?

     

    AAPL had $13B in net income just last quarter. FB has *annual* revenue of a little over half that. Got that? Annual revenue of FB far less than quarterly profit of AAPL.

     

    Not to say that a large enough group of GFB bulls couldn't push FB to a multiple of 500x or so and create a half a trillion market cap, but that seems highly improbable.
    16 Apr 2014, 02:51 PM Reply Like
  • Tomal
    , contributor
    Comments (1094) | Send Message
     
    "On the other hand, Facebook ad software provider Nanigans has said Q1 ad spend was stronger than expected following a slow start, and that it saw Facebook ad prices rise 10% Q/Q "across the board.""

     

    So which research to believe in ? Lol.
    16 Apr 2014, 12:05 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    FB ad prices can rise 10% and that may be great or terrible, depending on what the expectation is.

     

    Last Q was a 90%+ rise YoY in ad price. What will this Q be YoY? I'm guessing it may be a good bit lower than 90%. If price growth collapses after impressions have already peaked (since they were down 8%), then FB is going to have a BIG problem meeting expected growth patterns on ad rev.

     

    Which may explain why they are making headlines for everything ELSE-- perhaps trying to distract people from the perception that FB is primarily reliant upon ads, and that those ads are tapering in growth?

     

    After all, if people perceive that FB is also a mobile payment or VR gaming or Messaging company, they might be less likely to slam the stock when ad growth wanes.
    16 Apr 2014, 01:28 PM Reply Like
  • D. Appleton & Company
    , contributor
    Comments (345) | Send Message
     
    This contradicts other more reputable sources. Considering that the Twitter link directs you to a profile with a Hannibal Lecter avatar, I'm seriously questioning the credibility of this research. Perhaps they weighted PC ads against mobile and arrived at an erroneous conclusion, who knows.

     

    The reality is that mobile ads should increase in value slightly over time, considering the screen size of most mobile devices is small and the real estate is valuable. The main revenue driver, though, is the decrease in organic reach, which leads us to the conclusion that advertisers will have to pay more and more over time for exposure.

     

    ITG is more than likely wrong.
    16 Apr 2014, 02:01 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    I'm tempted to stick up for ITG because their supposed "research" would reinforce my position.

     

    But that doesn't make them right, and lots of people misinterpret data-- even data that is pretty cut and dry.

     

    Mobile ads will likely increase in value as people spend more time on the phones instead of on a desktop or in front of a TV.

     

    But it's not clear how that translates into FB revenue in the medium or long term.

     

    For example, native apps to get "push notifications" basically get free ads on mobile until someone disables those pushes.

     

    For FB to serve an ad to a mobile user, that user has to be using a FB app, at least for now.

     

    Again the question is growth. With FB's app already accounting for a huge fraction of mobile usage (2nd to GOOG), and the mobile ad density saturated (leading to declining impressions), where is the growth that's not already priced in? More FB apps (separate messenger, WA, etc) that each have their own ad streams?

     

    It's a catch-22. The price growth is driven by a saturated mobile space (not enough ads to meet market demand). Yet if they divide FB users across more apps to increase ad space, the price per ad plummets.

     

    I don't envy FB's situation relative to market expectations.
    16 Apr 2014, 02:34 PM Reply Like
  • Scott Ryan
    , contributor
    Comments (317) | Send Message
     
    That Facebook has had some unsustainable run is a fallacy. Facebook is barely up from the IPO price. They had the IPO priced correctly but the sell off to the low $17.58 makes shorts contend that the all-time low should be the measurement in how much growth FB has exhibited.

     

    The $17.58 all-time low was the - wrong price- in need of a correction. The rise from there back to the IPO price of $38 represents a correction to fair value. Let's not forget the IPO came out --May 2012! So FB, from its IPO price has risen a modest 55% from the IPO price over the course of TWO YEARS.
    Wall Street had priced it right in 2012. The ridiculous low FB temporarily reached amidst popular public enmity has absolutely NOTHING to do with what FB is worth. Facebook WILL be at $300billion in market cap in the not too distant future as investors wake up to the unprecedented and unparalleled nature of what they are. Facebook is not just a company. Facebook is an entire SECTOR unto itself. GOOG is now EMULATING FB (latest evidence the TITAN move) because they know they are threatened.

     

    I believe Mark Zuckerberg in regard to what he asserted about GOOGLE going after WhatsApp - and I believe GOOGLE TOTALLY lied in their denial to save face.
    16 Apr 2014, 02:40 PM Reply Like
  • monfrere
    , contributor
    Comments (581) | Send Message
     
    Scott you missed the point. Not share price growth. He's talking about revenue and profit growth. The stock is trading at 100x. That's not sustainable. They have to grow so that they can maintain the same price when the multiple drops to 20. That means they have to grow 5x just to stay where they are.
    16 Apr 2014, 03:33 PM Reply Like
  • xilef
    , contributor
    Comments (496) | Send Message
     
    If they hit their numbers this quarter, the forward multiple will be half of that, around 50x.
    16 Apr 2014, 03:44 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    Scott--

     

    Speaking of fallacies:
    1) IPO valuation is not automatically the proper valutation
    2) IPO valuation is not automatically the WRONG valuation either.

     

    Valuation is at all times and places a subjective, relative phenomenon. That means that if Facebook does nothing but stays on its current trajectory (which, if you'll indulge a little Malkiel, would include the sum total of all knoweldge and assumptions in the broader market, discounted to the present) its share price and market cap may change radically, and through no fault (nor credit) of the company.

     

    If the NASDAQ hits the skids, FB will likely tank along with it. But if investors view FB as the one glimmer of hope in an otherwise crappy NASDAQ, then FB shares will explode, because they are *relatively* more valuable. Capital is mobile and it always "seeks alpha."

     

    One reason AAPL has tanked is because it's no longer seen as THE hot place to make a ton of money. Not just because its growth has slowed-- but because other parts of the market offer big growth chances, so AAPL got sold off and other companies get bid up.

     

    FB may very well be spared the worst of a bad sell off. NFLX, AMZN, and lots of others have gotten slaughtered.

     

    Lately, it seems that FB down more than the market on down days, and up less on up days, but that's always subject to change.

     

    I will leave you with something to consider: Television was invented years before it was ever a commercial success. Why? Because the television studio and other means of content production didn't come until far later. Until then, it was a novelty. Innovation not delivered to the market is not innovation-- it's a novel idea.

     

    Facebook may have a lot of ideas. I think that's one thing Zuck has is an almost scatter-brained motley collection of ideas. But until those ideas are translated into VALUE THAT SOMEONE WILL PAY FOR, they are worthless.

     

    FB has a track record of lots of ideas, and very few of them have created value someone will pay for. In fact of all the ideas they've tried, advertising and payment are all they have left.

     

    Both of these markets have lots of alternatives available, and FB has no compelling argument that they can create enough of an advantage in either ads or payments to grow into their present valuation, never mind $300B.

     

    Facebook should be viewed as a widget manufacturer with a huge inventory of goods that are unknown in value. Until that inventory is sold, no one really knows what its worth. the 1.2B tons of inventory may be platinum, or it may be sand. Or seawater. It's *something* but the value is highly uncertain.

     

    Unfortunately, a huge inventory of anything has a lot of carrying cost, and if the inventory isn't as valuable as hoped, the enterprise value can be negatively impacted severely.
    16 Apr 2014, 04:19 PM Reply Like
  • monfrere
    , contributor
    Comments (581) | Send Message
     
    Forward multiples are a new invention to try to make the multiples seems less ridiculous. A high multiple already assumes massive growth next year. Forward multiples are just there to trick you into paying for next year's maybe as if it already happened.
    16 Apr 2014, 04:30 PM Reply Like
  • combatcorpsmanVN
    , contributor
    Comments (967) | Send Message
     
    Mr. Holm: Quit suffering -- Sell your shares in FB. Act on your own research and dump the shares, you owe it to yourself.
    16 Apr 2014, 02:38 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    No way will I sell my FB options yet. There's far too much money to be made from shorting this fella into next year.

     

    I am acting on my own research in the most lucrative way I know. Thanks for your advice though. But I'll stick to my own judgment on this one.
    16 Apr 2014, 02:41 PM Reply Like
  • xilef
    , contributor
    Comments (496) | Send Message
     
    Agree, you should go with your research and stick with your judgment. It's good to have folks like you here with opposing views. We can't all be bullish. In the short term, it will all come down to earnings and guidance and it's a coin toss at this point. Expected 24c but they are as likely to report 20c as they are 28c. I have more favorable convictions longer term but as far as price movement for the next few months, we will have to wait till next week.
    16 Apr 2014, 03:53 PM Reply Like
  • jpeizer
    , contributor
    Comments (10) | Send Message
     
    Dirt-stan, very clever...

     

    How is this for Clever? -- Facebook/WhatsApp/Asce... payments = the facility (software, connectivity, and financial infrastructure) to provide remittances to the families in Dirt-stan that have been left behind while their friends and relatives seek employment in the developed world -- but still need to send money back home.

     

    So just how much is that worth annually?

     

    More than 215 million people live outside their countries of birth, and over 700 million migrate within their countries. In the coming decades, demographic forces, globalization and climate change will increase migration pressures both within and across borders. Remittance flows to developing countries are estimated to have totaled $401 billion in 2012, an increase of 5.3% over the previous year. Global remittance flows, including those to high-income countries, were an estimated $529 billion in 2012.
    http://bit.ly/1kzzWqb:21924020~pagePK:51059...

     

    And how much can an enterprising company with a remittance facility make on that:

     

    Globally, sending remittances costs an average of 8.36 percent of the amount sent.
    http://bit.ly/1kzzY12#

     

    Lets see: 402 Billion * 8.36% = 33.6 billion give or take.... and let's say you capture 2% of that market -- that's $672,000,000 a year....

     

    I guess with a provincial perspective its easy to overlook the opportunities in the developing world and make jokes about it -- fortunately others with some more vision are figuring out where the value is and how it can be monetized.
    16 Apr 2014, 04:37 PM Reply Like
  • monfrere
    , contributor
    Comments (581) | Send Message
     
    Not clever at all unfortunately.

     

    Facebook is currently valued at 150,000M, so even if it was at 100% margin (it's not anywhere in the vicinity of that), 672M per year doesnt move the needle even the tiniest bit. Try looking up Western Union's market cap. And that's without development, after achieving scale and before prices are decimated by all this technology. FB, Wechat, Amazon, Google, paypal, square, bitcoin and literally HUNDREDS of other players in this market. 2% would be a MASSIVE win.
    16 Apr 2014, 05:02 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    Forgot slices of the pie, jpeizer. Payments will have companies drawing blood over the tiniest crumb flakes of the crust-- never mind anything resembling an actual slice of the pie.

     

    Try reading the book "Blue Ocean Strategy" sometime.

     

    Payments is about the bloodiest, reddest "ocean" out there.
    16 Apr 2014, 05:12 PM Reply Like
  • jpeizer
    , contributor
    Comments (10) | Send Message
     
    Justin,

     

    Facebook is making huge inroads in India and is investing in technology to connect more of the developed world where families are more traditional and tighter. If it adds financial infrastructure to allow for remittances, then these extended friends and families, already using social networking to stay connected with each other virtually, may well feel more compelled to also use remittance services incorporated into this package. I would argue it will end up feeling a lot more convenient and familiar to use financial services bundled into the social networking experience to stay virtually connected, send money back home, to kids studying abroad, etc...

     

    For example: You've just seen images of your new born niece in another country of facebook mobile, you fire up Whatsapp with its messaging and new skype-like feature to tell your brother how cute she is. Your brother mentions they need a new crib so you immediately transfer some money over as a gift.

     

    I see the social networking component actually distinguishing Facebook in this area, as an alternative to the traditional approach where remittance is primarily all about the discreet transaction.

     

    Obviously all the these recent acquisitions and announcements have to come to fruition - and come together, but I am less dubious of the overall strategic vision or the fact Facebook might have a unique way of exploiting remittances by adding "social" to the transactional component. it may prove a disruptive approach.
    17 Apr 2014, 06:13 PM Reply Like
  • jpeizer
    , contributor
    Comments (10) | Send Message
     
    Well, with all the caveats and concerns, this at least proves their strategy..

     

    http://read.bi/1mk1D65

     

    "This time, Facebook is working with bank regulators in Ireland to allow it to become a cash transfers and remittances company, like Western Union, according to the Financial Times."

     

    "On the one hand, this makes a lot of sense. Facebook has a huge international audience. Many immigrants keep in touch with their families in foreign countries via Facebook because it is free. Facebook's audience is mostly mobile. And in developing countries and China there is already a strong mobile payments ecosystem. The remittance business is ripe for competition because cash transfer companies take huge fees and commissions on even the simplest of international cash transactions."

     

    "If Facebook could bring these factors together — mobile, payments, remitances, and its massive built-in audience — it would be on to a winner."

     

    "Facebook has also discussed potential partnerships with at least three London start-ups that offer international money transfer services online and via smartphones: TransferWise, Moni Technologies and Azimo, according to three people involved in the discussions."
    18 Apr 2014, 01:34 PM Reply Like
  • ddevaney
    , contributor
    Comments (226) | Send Message
     
    The entire world is long on FB while Justin is short. The contrarians in life always lose.
    16 Apr 2014, 08:29 PM Reply Like
  • monfrere
    , contributor
    Comments (581) | Send Message
     
    I'm short. I remember when people told me that I was stupid to be short Blackberry at $120 and stupid to be short JCP at $45 and stupid to be long LVS at $2. Those three trades account for hundreds of thousands of dollars in my portfolio and a significant portion of my total returns.
    Contrarians are the only ones that can ever really win. By time everyone else is doing it, it's too late. Justin and I are being cautious while others are greedy. Paying 100x earnings and hoping that a $150B stock will continue to appreciate is nothing but greed.
    17 Apr 2014, 08:38 AM Reply Like
  • jpeizer
    , contributor
    Comments (10) | Send Message
     
    Long Term Prospects (part 1)

     

    I have no idea what Q1 ER will bring or what the short term stock prospects are, but I don't understand the pessimism at Facebook's long term prospects, and this talk of saturation, particularly in Mobile advertising when according to Emarketer:

     

    Last year, global mobile ad spending increased 105.0% to total $17.96 billion, according to new figures from eMarketer (and BTW it revised this fiigure upwards from 14 billion). In 2014, mobile is on pace to rise another 75.1% to $31.45 billion, accounting for nearly one-quarter of total digital ad spending worldwide.

     

    Emarketer Predicts $95 Billion in total Mobile ad spending by 2018...

     

    - In 2104, eMarketer predicts [facebook's share] will rise again to 21.7%.
    - In 2014, eMarketer estimates that mobile will account for 63.4% of Facebook’s net digital ad revenues

     

    So let's assume for a moment that all things being equal, Facebook, which has already proven itself one of the two leaders in Mobile ads does not see its share of mobile ads rise any more than 21.7% thru 2018 (we'll use that ceiling to account for other competition). And let's further assume that Emarketer is off and the market only grows to 80 billion by 2018. Let's be further conservative and assume that Facebook derives no more than the its current 63.4% off mobile revenue.

     

    21.7% of 95 Billion is $20 billion dollars -- and that's projecting only 63.4% of Facebook's revenue.... and discounting all other innovation and things it is getting into.

     

    http://bit.ly/1mesPFX

     

    BTW I am completely discounting this trend after 2014 for long term prospects: "Facebook in particular is gaining significant market share. In 2012, the social network accounted for just 5.4% of the global advertising market. In 2013, that share increased to 17.5%, and eMarketer predicts it will rise again this year to 21.7%. Google still owns a plurality of the mobile advertising market worldwide, taking a portion of nearly 50% in 2013, but the rapid growth of Facebook will cause the search giant’s share to drop to 46.8% in 2014, eMarketer estimates."
    18 Apr 2014, 05:17 PM Reply Like
  • jpeizer
    , contributor
    Comments (10) | Send Message
     
    Short Term Prospects

     

    After reading the pros and cons here and doing 2 days of research on marketing, mobile and social media sites, it appears to me that Google's loss is Facebook's gain in the mobile arena and that Facebook is better at monetizing that gain for itself because its mobile ads are better targeted, in higher demand and command more money than its previous banner ads. By contrast Google's cash cow ads are being cannibalized by its lower cost mobile ads. Facebook's cash cow are ads that facilitate downloading of other apps which are wildly popular (and the reason for Twitter's recent purchase to emulate it).

     

    Related to the Nanigans, OTR and ITG reports above, it's worth noting that Nanigans is actually Facebook's ad engine provider. "Nanigans said its clients include 200 of the world’s leading performance marketers in retail, travel and gaming." So it knows firsthand what its clients are doing. OTR and ITG on the other hand are third party research firms collecting data from a broader swath of the market -- but second hand.

     

    I think this excerpt from the Nanigans report below, correlates well with OTR findings above. The OTR findings imply a broader softening of ad spending among a broader group of clients because the facebook ads on mobile are so competitive that Facebook can charge 10% more to fewer big spenders who will buy them.

     

    - Spending in Q1 dropped slightly — by 5% — compared to the fourth quarter of 2013.

     

    - Cost per click rates increased 10% from the fourth quarter, likely due to increased competition for targeted audiences and content in the News Feed, leading to a spike in demand.

     

    - Impressions were down 17% QOQ and 48% YOY, showing there are fewer but higher value impressions.

     

    - App discovery continues to be a priority for app developers. Mobile app install ads were the most popular mobile ad unit capturing 74% of mobile ad spending.
    Advertisers have shifted their focus to the News Feed with 81% of desktop ad spending allocated to News Feed ad units.

     

    http://mklnd.com/1mkyWGa

     

    This makes the ITG report the outlyer -- unless of course what they are actually seeing is the broader market bidding lower CPC prices to show their ads because they don't wish to bid higher (ITG), and are thus spending less overall (OTR). Meanwhile, CPC continues to rise (Nanigans, ITG) because the smaller group of big buyers are spending more for better targeted ads. This would bring the Nanigans report, the OTR Report and the ITG reports into alignment rather than being contradictory. So the broader market is spending less to display its ads while the big spenders fill the gap by paying more for their ads.

     

    If so the question becomes if this shift to big spenders and higher cost ads offsets satisfying a broader constituency. It's worth noting that following its report in March the Benzinga April reading for OTR on Facebook is Positive.

     

    http://bit.ly/1mkyXd8

     

    Its also worth noting that even ITG says Facebook may come in *AT* or below earnings, so even its not sure that this shift will be detrimental.

     

    Of course the final issue is even if FB makes its numbers - how much higher does it go short term?
    18 Apr 2014, 06:49 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    Let's assume FB not only makes them numbers, but comes in at .28 or something that's more than a standard deviation higher than the mean expected EPS.

     

    What does this mean for the valuation of a $150B company?

     

    I don't know. If you *knew* that a company would eventually reach $5B in net income, wouldn't you expect that getting to that $5B faster would command more value? I sort of would, since those future cash flows should be less heavily discounted.

     

    But what if you didn't *know* that the company would hit $5B with certainty? What if you thought it would get there, but lots of people disagree. What if the faster growth of top and bottom lines reduces certainty in a bad way-- like it becomes crystal clear that the company will never earn $5B in a year?

     

    This is kind of where I'm at. I'm almost rooting for FB to grow FASTER because it will accelerate the revelation of the long term prospect of FB.

     

    At the end of the day, I think it's most telling that FB bulls have to talk about payments to people in India to underpin the optimism they have. It's a HUGE market (where most people have to walk a good distance to get potable water). Think of all the people on FB in India (after they worked a 14hr shift weaving fabric BY HAND on a hand loom).

     

    The scenario of people in India seeing baby pictures and buying a stroller is hilarious. Nothing like a little ethnocentric projection, eh?

     

    Big business learned a long time ago the simply being in India or China is FAR from a guarantee of success. IN fact, many ventures into those countries have failed, and those that are succeeding are not exactly the most lucrative investments.

     

    It is the emphasis on these "growth areas" that is revealing the likelihood that FB is approaching the apex of its growth curve. By this time next year, its growth will likely have slowed to far less than half its present rate, and even basic analysis will show FB asymptotically approaching a value far less than $150B.
    19 Apr 2014, 10:52 PM Reply Like
  • jpeizer
    , contributor
    Comments (10) | Send Message
     
    Justin,

     

    I do thank you for you latest reply. BTW I like you're devil's advocate stance and feel its necessary to check any over-exuberance.

     

    What is the APEX of Facebook’s growth curve as THE dominant global social networking platform (with the size and revenue to maintain its position better than smaller players)? Is it user numbers? Number of Apps you can serve ads from? International Reach? Number of advertisers? Number of mobile dollars? Number of revenue streams?

     

    There is some implication they are a one trick pony and can neither navigate or forecast the same things you are concerned with. If they could not pull off mobile or Instagram I would agree these concerns would be more valid -- It pays to remember however that Google, a company that seemingly can do no wrong, is still struggling with mobile (and it's had lots more time and experience to get that right, no?)

     

    I am sensitive to your P/E concern, but I think the current P/E is more of a reflection of FB's current significant growth trajectory than it is the company's real valuation - otherwise NFLIX and LNKD... well. At some point, I agree, that has to slow, the question is when, and if FB is in a growth decline or possibly just ramping up... When I look at my fidelity screen I see the average P/E for the Industry FB is in is 57 - so there is some relativity here I think. Let's face it --people are not investing in Facebook for what it is, but rather for what potentially it could be -- and there is some proof in its work over the last year that this potential is justified - far more than companies with higher P/E's and leaner bottom lines...

     

    The question for me about FB's long term prospects is this-- is Facebook standing still and resting on its laurels -or- is it looking at the future and trying to be strategic for the long haul. Has it identified problems in the past that might have limited its success and tackled them appropriately -- converting weakness into strength? The answer appears to be yes. History also tends to be a useful indicator of future success.

     

    FB appears to have laser focus on fixing problems (like mobile, ad penetration, falling millennial numbers on the core app) and finding solutions (with plays like Instagram, Whatsapp, Remittances and hopefully Oculus). Having worked in systems for years, I was honestly not an early Facebook investor or a believer for that matter. I didn't see that a revenue model could take off serving banner ads to people on your social network unless you could prove to me there was a way they'd be at all relevant while social networking instead of a complete nuisance.
    I have however been impressed by how Z has navigated each hurdle, always thinking ahead. He appears to be someone laser focused on the business, getting it right, and not standing still. I don’t think its random thoughts of a scatterbrain either.

     

    First there was the obvious problem of ads in a social network - I think its genius that he managed relevant ads in newsfeeds and focused on something people actually like to do on cell phones- download apps - as his ad focus. I think it’s also genius that he's managed to grow his user base, get so many companies to access them by providing organic ads (because it's a user base they simply cannot ignore)... and is now squeezing these vendors and saying "you've been drinking at the trough for free, now you have to pay if you want users to see your stuff -- and BTW they have to be relevant" - That's a reasonable request -- as long as he could prove the ads were better targeted, and he waited for that to happen before approaching them. It's the old heroin in the playground trick -- he's got them hooked already, now they have to pay for it- and it would appear the big players are spending too. You want to do effective mobile advertising on social and reach a billion+ users? -- Well, you have to go FB.

     

    Everywhere you go there is a Facebook logo both online and in brick and mortar stores.... Can that change? Sure. And someone can also come up with a more phenomenal search engine than Google too. Am I worried that teens are fickle and switch apps -- yes. I wonder if it means paying 14 billion every five years for the next new thing ;-)

     

    But at least *I AM SURE* I am not the only one worrying about it. I am pretty sure Z is staying up at night wondering what new revenue sources he will open up five years from now and looking at every current metric to see where the weaknesses are now... My greatest worry actually is if Z and/or Sandberg get hit by a bus.. Now that would be a concern. Fortunately I don't think Z gets out much ;-) - I have this feeling that this guy does not like to fail -- And I have spent a good part of my life betting on people/institutional/p... success based on the drive, ambition and competence of the people running it.

     

    I don't think anyone doubts the saturation or ubiquity of Facebook in the US - which is exactly why they need a muscular International strategy, more apps they can serve ads on, new revenue streams and continuous monitoring of next generation trends.

     

    Now about the Ethnocentric thing ;-)

     

    I have worked in 70 countries from New Zealand to Mongolia and feel you may be discounting the Western influence in India these days with all the connections that currently exist between Expats and families back home...

     

    How India Became America
    http://nyti.ms/1feg1HV

     

    Was it a sign of weakness that Coke or McDonald's needed to expand outside the US to keep growing? That's the whole point of globalization, right - to reach more audience.

     

    I would suggest FB's advertisers ABSOLUTELY need the global reach they are providing. Business doesn't stop at the border for most US and certainly non-us companies using Facebook. They aren't JUST running ads for US teenyboppers -- and the potential is still huge because marketers are still underutilizing it outside the US. That said 48% (under 50%!) of FB ad spends are currently in the US and 35% are in Europe presently. The Asian and LatAM markets are still in their infancy.

     

    http://bit.ly/1feg1I1

     

    Bottom line, it would be ridiculous for Facebook *NOT* to have a well-honed International strategy for its advertisers. That's also thinking ahead.
    So I am far more positive about his International expansion strategy than you may be. Around the world the trend lines for connectivity, mobile, and reduction in poverty in many countries is moving in the right direction. So it makes complete sense to expand into these markets and use the strength of social networking to keep families connected between the developed world where they work and the developing world where they send money and goods home to. India BTW has reduced its poverty rate from 60% to 33% between 1985 and 2010 - and there are more Indian expats than there ever have been living in the US and Europe that send money home -- do development work back home, etc.

     

    When I think of the total number of immigrants, and permanent residents in this country keeping connected and sending money home.... and in Europe too. With remittances FB is opening up a potentially whole new line of business for a segment of their current user user base. And while you might disagree, i think Facebook is very well positioned precisely because of what it is to take advantage of remittances - by working with the appropriate financial firms and layering its social networking expertise on top of it.

     

    For some, FB is a social networking platform, for others a gaming platform, adding a financial/platform lifeline for a segment of its users seems like a very smart move to me. *IF* it takes off, I assume it will be very lucrative for them.
    Finally -- I Just wanted to correct something in my "long term Email" above - to be more conservative:

     

    Related to limiting its share of the projected 95 Billion in mobile revenue I should have said Facebook would derive more of its current income (like 80%-90%) rather than the current 63.4% it does now. Meaning, even if all other income shrank, and FB's market share of it remained static the mobile income potential is still huge because the total market for it is expected to expand *Five Fold* between now and 2018.
    20 Apr 2014, 11:39 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    Jpeitzer, that is easily the most intelligent and reasoned bullish FB posting I've seen on FB.

     

    I don't know if FB is a one-trick pony at all.I'd agree with you to some extent that if they are a one-trick pony, then their growth is limited.

     

    I think we've kind of homed in upon the root of our different views of the company's future prospects. The bulls think that expansion/diversification for FB will go well as it builds upon its presently dominant user base. The bears think that as FB departs the core of its identify as a social network, it will encounter more competition than ever before and will be stifled in its growth efforts.

     

    Once you assume one of these two positions, all the rest falls into place. Either you think the P/E is vastly overstated, or you think it's typical of a company poised to explode and dominate.

     

    I don't interpret FB's diversification efforts as a favorable thing necessarily. I think that dismantling the FB machine is dismantling its brand to a large degree. Again, this is likely confirmation bias on my part due to having taken the Root Assumption as being "stifled" rather than "growing."

     

    I don't see either a laser focus on problem solving. This I don't think I'm being as biased. I don't see how Oculus solves a particular problem. It's the answer to an unasked question thus far. Not to say that it cannot become huge-- I believe fully that great innovation can create it's own demand. (The market wouldn't demand an iPhone in 2006 because it didn't exist and no one thought it was possible).

     

    Facebook has expanded into mobile, but the effectiveness of that I still can't quantify separately from the move to mobile in general. They had to be there to be even remotely relevant. Are they doing it well? Yes, the numbers seem to indicate they are. Are they doing it as well as they *should* be? Impossible to say-- you'd have to know what the entitlement rate would be. Should we be surprised that a network with 1.2B users accounts for 20% of all mobile activity? I don't think so. It seems somewhat par for the course.

     

    If Facebook can expand its ad base and payment bases as the bulls think it can, then those bulls will have a very handsome payday and I will lose my "vegas" investing money.

     

    Until FB demonstrates an actual path to revenue instead of just a lot of hypotheticals based on "because user base huge", I remain a skeptic.

     

    I could be very wrong on this, of course. After all, I'm the guy that sold NFLX at $125 after I bought on the crash ($72 or so, I think). Oops.
    21 Apr 2014, 09:37 AM Reply Like
  • ddevaney
    , contributor
    Comments (226) | Send Message
     
    Bragging will get you no where!
    21 Apr 2014, 03:36 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    Bragging that I didn't have the foresight to hold NFLX all the way to $400?
    21 Apr 2014, 04:05 PM Reply Like
  • jpeizer
    , contributor
    Comments (10) | Send Message
     
    Justin,

     

    To see the potential, you need to separate what you think of as Facebook -- Facebook.com -- with the real focus - to be "The" social networking platform provider.

     

    And when I say social networking platform, I don't mean a website --

     

    What is under the hood of facebook.com is far more important than the site's user interface. What Z is creating / buying is a set of social networking tools that work across platforms and suck in both users and vendors.

     

    People/analysts are unfortunately still fixated on the one platform and how many teenagers are using facebook. When you cross 1 billion users across multiple apps on both the PC and mobile the question to better ask is how many advertisers are using your platforms because the next best alternatives are limited - and how well you can continue to extend their reach?

     

    That's why I think people are having trouble seeing the potential - because its not there unless you know how to adapt and evolve to people's changing use of social networking. What people are forgetting is that Z understands the behavior of social networks just like Brin and company understand search.

     

    The nature of social networking is distributed -- so it makes sense the platform strategy would have to be distributed as well as people's needs evolve, new tech comes into play, etc..-- Facebook.com works as a hub linking all these things -- and also a brand (when convenient - sometimes its much better just to be instagram to your audience and hide behind it). In my opinion people are tying FB's fortune too closely to - facebook.com and not realizing that it is a means to an end. An important building block, but not the only one.

     

    So when we look at the purchases in this light, what Z is doing is taking social experiences that are already being monetized and - like gaming (oculus), communication (mobile/whatsapp) and payments/remittances, and applying facebook social networking tools to leverage them in that universe - where they can also be leveraged and aggregated.

     

    The way he is rolling these things out is also telling -- first collect the eyeballs, hone the experience, and then start collecting revenue.

     

    My problem is not seeing the potential, but rather how to best execute such a sophisticated multi-part strategy.
    21 Apr 2014, 10:05 PM Reply Like
  • Justin Hohn
    , contributor
    Comments (713) | Send Message
     
    I see the potential-- I just think it will remain unfulfilled. Here's why:

     

    If FB moves to being a 'platform' then it has moved away from its sustainable competitive advantage as a social network and towards markets/services that are infested with entrenched rivals.

     

    FB could of course move into voice networking with WA, but being in a new market means new competitors. Is there a reason someone would sign up for a FB voice plan vice Verizon? Certainly there could be-- but it would have to be cheaper for them, as simply selected a new provider offers no intrinsic value.

     

    FB can get into payments of course. But to unseat Paypal or BoA or any financial service firm is a tall order. Again-- what is the value proposition that would cause me as a consumer to switch to FB services vice someone else? Lower cost to me? Convenience?

     

    Wash rinse repeat for all these "if" markets that FB *may* get into. The FB business model created value by "connecting people" in a new way. But that's very different than connecting people in all ways and owning all those connections. For one, FB has a trust issue to overcome. Do I trust FB to own all my pictures, financial info, all my email? I don't. I doubt I'm alone.

     

    FB's migration into other areas could bring new revenue for sure-- but it will have to prosper as it transitions from a market where it was a dominant hegemon with no real rivals to other dispersed markets with entrenched rivals in voice, texting, payments, and whatever else new business Zuck thinks is part of his goal of world domination.

     

    In conclusion-- FB ability to execute such a grand vision is very much in question, as they've only successfully executed two things-- 1) build a social network and 2) buy rivals that might threaten it.
    22 Apr 2014, 07:35 AM Reply Like
  • jpeizer
    , contributor
    Comments (10) | Send Message
     
    Justin,

     

    At this point of course we are discussing Facebook long term prospects and not what the stock will do in a few days ;-)

     

    You don't have to own every connection. All you have to do is convince folks that
    you are the dominant social networking play in the various sectors that you are in and the advertisers will follow.... Google doesn't own every aspect of search -- but it is the go to dominant player.

     

    I think actually a tipping point has already been reached with FB.

     

    The question among advertisers used to be: Does Facebook have enough of a user audience / staying power for me to invest in advertising on it (and will my ads even work?)?

     

    In the last year the question has flipped to: Can I afford avoiding advertising on Facebook platforms with my social networking dollars? ("And hey, these targeting algorithms do seem to be doing better for my business!")

     

    Facebook has accomplished a number of things:

     

    1) Dominating the social networking space (as far as advertisers are concerned)
    2) Monetizing the social networking space most effectively - FB has basically defined how to do it.
    3) Monetizing the mobile ad space more effectively than any SN rivals or Google
    4) Demonstrating they are adaptable
    5) Developing the core Facebook DNA and effectively integrating it into other apps and spaces.
    6) Growing and buying the largest user base (and they can continue to do that)
    7) Developing better targeted marketing algorithms

     

    I don't want to sound too cynical here -- but Facebook can actually "buy" its expanding user base by investing in other apps and growing its international audience. Then all it needs to do it roll out its branding clout, tools and algorithms to its current advertisers and say -- "Here are another few hundred million eyeballs for you...".

     

    Do you actually think advertisers *at this point* are going to abandon advertising on the Facebook platforms because they lose a few teens?
    I think not. Where else can they more effectively plop their social networking advertising budgets? The nature of the game has changed. You'd have to demonstrate wholesale abandonment of the FB platform*s* at this point. And they haven't even started fully monetizing the base they already have...

     

    For Facebook, the focus now is spreading like a social networking octopus with tentacles into different mediums, with targeting algorithms so compelling that advertisers can't avoid them.

     

    From an Investors point of view:
    =====================
    Google strength was understanding how to do and monetize search
    FB's strength is understanding how to do and monetize social networking

     

    To your point:

     

    Facebook doesn't have to DOMINATE financial services - all it has to do is get a decent piece of the action as THE social network doing it.

     

    Facebook doesn't have to DOMINATE text messaging - all it has to do is get a decent piece of the action as THE social network doing it.

     

    Facebook doesn't have to DOMINATE VR and gaming - all it has to do is get a decent piece of the action as THE social network doing it.

     

    And getting into these things simply makes Facebook more relevant for that segment of the FB user base that does gaming, does messaging or wishes to stay connected and also transfer money.

     

    I think the Credit Suisse folks explain what I am trying to say far more elegantly with their layer cake analogy in their recent financial analysis:

     

    http://on.barrons.com/...

     

    I think they get it - this isn't about how many teens access facebook.com anymore.

     

    BTW I don't know what Facebook's short term stock prospects are, but I do think 2014 will define if its a Juggernaut with long term staying power that will dominate the social networking space in the same way Google has dominated search - or if it's a passing fad that has peaked. My guess at this point is that it would have to stumble badly to be the latter because it has already convinced advertisers of its relevance as the go to social networking play.

     

    22 Apr 2014, 01:32 PM Reply Like
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