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  • Why Facebook Is Worth No More Than $7 A Share. All FB Investors Should Read This.

    Its clear from FB's IPO aftermath that the hopeful price of $38/share vastly overvalued the company. To put a market cap in excess of $100 billion for a single-web site company is the realm of joke fantasy land. I cite 6 key reasons why I think FB should have a PE ratio of no more than Google at this point and reflective share price of around $7.

    (1) Business model is flawed: At present Facebook is a company with a single internet property, its social networking site. It has a vast membership in excess of 900 million and is the most used site in many developed markets such as the US and the UK. As such where can it go from here? Its unlikely its existing users will use it more. Where will new users come from? No US internet company has been successful in China, and the strong existing social players in China mean FB does not have any realistic chance of developing here. Additional users will be from very emerging markets with low spending power and less interest to advertisers. So a very, very key concern for investors should be this. Given Facebook's penetration seems to be at its peak, why can't it generate more revenue? If it can only generate 4 billion or so from 900 million users, how will it get to the 20-30 billion USD revenue it needs to have to justify any valuation north of $20/share? My view is that users will switch off the site if FB tries to push more advertising and product promotions on users. I believe fun and business do not mix on the internet. Once you have provided a free/ad free experience like Facebook did (and one reason for its wild success), its extremely hard to either charge for it or fill it with advertising. FB realize this and state in their mission their priority is user experience. I feel they will never be able to monetize this to the extent necessary to justify the share price. GM and other advertisers realize this and are jumping ship to a forum where they can promote their brand more directly.

    (2) Barriers to Entry are low: Facebook just bought Instagram for $1 billion, an internet site with less than 20 staff and no revenue. This demonstrates it fears new start ups hungry for a piece of the action. There are a hundred Instagrams out there, offering commercial free, charge-free experiences to users. The barriers to entry in this market are effectively zero. Imagine if Facebook started to try to charge its users in some way for staying on the site. A new start up would offer "Join our site and we will "scrape" your Facebook information to our site, tell your friends and you will have an ad free, no charge experience just like the old Facebook, and not be filling the pockets of 28 year old billionaires". This terrifies Facebook, hence their paying a billion for Instagram. But they cannot pay a billion for every cool start up out there without destroying their own balance sheet.

    (3) No Mobile: This is an often touted weakness of the stock and its very, very real. Consider that for most people, all their "fun" internet time is now mobile. Increasingly desk top time is at work, where FB is either blocked or the time on the site is limited. I cannot see how FB can easily put ads on smartphone Facebook experiences; perhaps there will be a tablet offering with more space, but I remain skeptical. News that FB may launch its own smart phone is ridiculous for a company with no history in operating system or hardware integration design.

    (4) FB Data a Goldmine: Much is written about the value of the data FB holds on its users. I do not buy it. Much of it is spontaneous and "like" data on people's ever-changing thoughts and it is very hard to relate this to actual buying decisions. Consider MasterCard and VISA have what should be the gold standard of consumer data. What people spend on what, where and with what regularity. Can they and do they leverage this? No. Privacy laws restrict in place in key markets restrict it.

    (5) The FB IPO: The internet is awash with stories about how retail investors lost a portion of their life savings buying FB at an elevated price while Wall Street insiders and Facebook staff made millions. Reputation is everything for a social networking site, and a backlash is emerging and could grow, causing people to regard FB in a manner they definitely do not want to be regarded, especially as they are pressured into pushing advertising on the site and maybe even charging users.

    (6) Finally, GOOG vs FB: Facebook has won the internet usage war and now people spend more time on it than Google. But FB is a "fun-site" and captures people when they are in chat, chill out and relaxed mode. While people spend far less time on Google, they are in a more practical frame of mind, ready to make buying decisions. Advertisers know this and respect the "search and click through" value of Google. There is no evidence that FB's sponsored ads or other ads will present advertisers with better value than space on Google, and a lot of evidence to the contrary. At best FB's revenue should be valued on par with Google's. At present the sales/market cap ratio for GOOG is around 5, with the figure for FB an inflated 15!

    The above is a qualitative analysis of the share price, a detailed fundamentals-type analysis is not warranted at this stage for FB. It needs to be considered in terms of where it will be positioned in the internet universe in the future and I believe the above reasons are enough of a reason for investors to seriously doubt its current ratios. There is no reason to pay such a high multiple for this stock given these risks. Do NOT listen Wall Street analysts on this one, they have a vested interest in propping up the share price that was rammed down retail investors' throats on the IPO. Happy investing!

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

    Jun 02 3:21 PM | Link | Comment!
  • Why NOK Will Beat AAPL In Tablets In 2013
    When AAPL first came out with the iPAD a few years back I was perplexed at one glaring "fault" and was convinced it would not be a hit. Turns out I was wrong of course and this glaring fault was overwhelmed by the beauty of the design, the functionality and the legions of Apple fans who could now view their tunes, photos, vidoes and Apps on a proper screen. But I believe that as competitors understand what Apple has done with design and functionality and mimic it, Apple's "glaring omission" from its iPADs will become a serious weakness in the market. I am talking about the lack of a UBS or other port via which to upload or download files to and from the iPAD. Suppose I am travelling and want to download photos from my camera to the iPAD (I choose this time to travel with this instead of my laptop). No go. I need to find an internet cafe with itunes on a computer, and even then, its not synched with my iPAD so I am stuck. Apple's insistance to its iphone and iPAD users that they can only control these devices through itunes installed on a computer will, I believe, ultimately cause customer defection as competitors match Apple's hardware and software functionality. A combo to watch carefully is the anticipated tie up of Windows 8 with Nokia's hardware in the form of a tablet. Although not due to market for at least 6 months, it may be the first iPAD killer. It will come equip with a UBS port, no restrictions on what users can or cannot load on to it (why is APPLE telling us what movies, books, tunes or other content we can load on our device??), the full force of MS's app developers (over 1 billion users and the world's largest population of app programmers). Crucially, it will come armed with tablet versions of Excel, Word, Powerpoint, Outlook and other familar apps known to almost all computer users the world over. It will transform what is essentially a very elegant consumer toy into a mission critical enterprise mobility tool, and I believe, transform the workplace in the same way RIMM first did with the Blackberry. NOK remains the world's largest mobile phone maker with huge economies of scale and distribution the world over. Microsoft remains the largest vendor of enterprise software. The enterprise device market remains 5-6 times larger than the consumer market, and it does not take a leap of faith to see that given APPL's insistence on maintaining (against customer needs and desires) an ironlike grip on its ecosystem and what one is allowed to put on its devices a viable alternative which overcomes these issues AND delights the consumer with design (which NOK has done countless times in the past and recently with its LUMINA phone) AND which has the backing and customer reach of the world's largest business software vendor WILL steal share. NOK is currently worth 18 billion USD, Apple 515 billion. Both sell similar numbers of devices although AAPL's sales are double NOKs. I realise PE and margins are what determine the shareprice, but given the above developments I know where I would place my bets going into 2013. I am long NOK 2013 Call options.

    Disclosure: I am long NOK.

    Mar 13 11:28 AM | Link | 1 Comment
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