Facebook (FB) is now up over 300% since its 2012 IPO, and has been one of the most adored stocks on Wall Street and Main Street alike. Despite excellent historical performance, the stock exhibits 5 characteristics that point to the potential for a short opportunity.
1. Qualitative Relative Value Analysis --- Within FANG ($FB, $AMZN, $NFLX, $GOOG), Facebook is the only company that has a business that people (especially millennials and gen z'ers) CAN live without. Netflix for example, is a place where young people pay to watch content, which increasingly, is exclusive to that platform. Google has established a near monopoly on search, receiving 77.43% of global use, compared with other search engines in the latest SmartInsights.com Survey. Amazon speaks for itself, and is in the process of establishing the dominant space for shopping in the 21st century.
On the other hand, Facebook is in the social network business. Unlike Amazon, Netflix and Google, Facebook has to compete to keep its market share, with each generation having radically different social media preferences.
2. Sentiment can change quickly --- Facebook (like most internet stocks) is a trader's trade. Without a dividend, and traditional margin, scale and cash-flow characteristics of a more traditional brick and mortar business, Facebook tends to attract investors that 'buy things that go up, and sell things that go down' rather than those who seek to own assets that generate cash. This makes the stock highly sensitive to sentimental changes, in the stock, the sector and in the market as a whole.
3. Could Mark Zuckerberg become the next Marissa Mayer? --- Much like with other FANG stocks, Facebook's multiple is highly dependent on Mark Zuckerberg's 'guru' status. Many investors that buy stocks like Facebook, are purely making the bet that Mark Zuckerberg is the next Steve Jobs. Over the years, sentiment around tech CEO's has proven to be extremely fickle. When stocks fail to perform, even for a short time, investors quickly develop negative attitudes about the CEO. How many times have you heard "Tim Cook just isn't in the same league as Steve Jobs" when Apple ($AAPL) has a down day, week or month?
4. Uncertainty About the Effectiveness of Social Media Advertising --- Most investors would not categorize Facebook as a 'startup'. When thinking about Facebook in the context of social networking, the company is most certainly not a startup, but rather the most established player in the space. When looking at Facebook as an advertising business, it's very much plausible to categorize the company as a startup. Large advertisers also remain concerned about Facebook's history of pushing certain ad products as 'the future of advertising', before quickly abandoning them, in favor of a new ad product. Some dismiss this as simply the nature of the 21st century technology, but large Fortune 500 advertisers remain concerned about this.
5. Pattern of fudging the numbers - One of the top concerns of both advertisers and investors is that Facebook does not allow independent third-parties to measure advertising performance, but rather reports it reports its own internal numbers. Facebook has admitted several times to miscalculating advertising metrics. Most recently, in September 2016, the company told the Wall Street Journal:
"We recently discovered an error in the way we calculate one of our video metrics. This error has been fixed, it did not impact billing, and we have notified our partners both through our product dashboards and via sales and publisher outreach. We also renamed the metric to make it clearer what we measure. This metric is one of many our partners use to assess their video campaigns."
Why does a company that seems to be so good at building and implementing social media technology seem to have so many problems tabulating the performance of that technology? Questions like this linger in the minds of many Facebook skeptics.
Conclusion: Facebook is not per se overvalued by any quantitative relative or absolute value measure. When analyzing the business on a qualitative basis, it exhibits some of the characteristics of stocks that have seen precipitous drops during bear markets. In looking for short beta within the tech space, Facebook is a primary candidate in my view.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.