Mark Zuckerberg made all the headlines a week ago when he gave his first public interview in a TechCrunch conference. He mentioned Facebook (FB) was concentrating on mobile as well as improving its Search function, both of which would significantly add to FB’s revenues. Investors cheered and the stock has been up almost 25% since then, before taking a breather yesterday. So is Facebook a buy or this is a head-fake ? Let’s look at the facts –
1) FB’s revenues from advertising on the desktop is slowing down. It seems like the IPO was timed to perfection by the company, the underwriters and early investors. Any later, and the bad news about its growth on the desktop would have become evident to all.
2) Mobile advertising is easier said than done. And just saying FB will focus on mobile is simply not enough. Every major social site has this problem and nobody has found the OptionEDGE of mobile advertising yet. The screen real estate is simply too small to have a meaningful user experience and a solid advertising revenue stream.
3) Facebook search – So users are now expected to go to Facebook and search the World wide web for information ? Seriously ?? A search for Pizza shows up pizza places in Chicago even though FB knows I’m in the DC area. It’s not easy to do what Google (GOOG) is doing. Google’s technological prowess in Search is vastly underestimated. The job of crawling, indexing, keeping the index fresh, throwing out spammers and do this on a global scale day after day for every web document that shows up on the web is no small task.
4) The Facebook advertising system is being gamed – we’ve mentioned this earlier. In our case (a startup), we advertised for a week. We got a 100 Likes and almost 95% is from people that seem to have no connection to financial markets at all. My ad clearly put College degree as a filter, and interests in Finance as well, but these people seem to have neither. (Click on images on top and below). The people that have Liked our page have also liked 5000 other pages. It seems like all they do is come to Facebook and keep “liking” some company or the other. This is really fishy. And the moment we took our ad off, these people magically disappeared. Now I’m not alleging that FB has a hand in this, I have no proof of any such thing, but I also can’t imagine any other company that would directly benefit from these fake likes except Facebook. After all only FB gets paid when someone clicks on the ad. Like General Motors and several other large and small companies, we have decided Facebook advertising is completely useless and will not be continuing it again.
5) Finally, people come to FB to fill a social need. Its really not designed to be a business platform. Sure they can do some advertising here and there. But as their numbers show, this is clearly reaching saturation. Mobile and Search are longer term initiatives and these are huge challenges. There’s no silver bullet that can get quick revenues in the near or medium term. Investors are a fickle lot – just as they loved Mark’s statements last week, they will abandon him in a minute.
I’d use this 25% bump in the stock price to buy some Long term (1 year at least) Put Options at the 15 strike price. These Jan 2014 Put Options are way out of the money, are dirt cheap at $2/share, and could provide a triple digit return in a few months. If FB falls to 18 again anytime in the next 9 months, these Options could be worth upwards of $4/share. And if it does fall to $15, the Options could be worth $6/share.