|Forbes.com, Summer, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with forbes.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site, forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.|
When I see a company making bold decisions I find it useful to see what happened when other companies made similarly bold decisions in the past.
In Facebook (FB) I am seeing a lot of Microsoft’s tendency toward invasiveness and a lot Kodak’s oblivion.
I’ll start with the “Microsoft problem.” Facebook has an astronomical number of users, just like Microsoft (MSFT) used to. Not too long ago, about 99% of microcomputer users relied on Windows. It was a giant, swaggering technology company with profits out the wazoo and a stock price to match.
It wasn’t just that a Federal Trade Commission resulted in an order to break up the company. It was the arrogance of the company. With little organized resistance, Microsoft seemed to use it’s marketshare to shove products down customers’ throats they didn’t necessarily need or want.
This is what I’m seeing in Facebook. Heck, this is a company that changes its layout more than many people do their laundry. In the process, it appears to me that Facebook has come to view users as marks rather than customers, with privacy thrown to the wind.
Then there’s the “Kodak problem.” The world went digital, and Kodak, which made some rather feeble forays into digital, basically stuck to film with disastrous results. I’m seeing the same hubris over at Facebook. While the world goes mobile, Facebook seems stubbornly glued to the desktop.
Investors were clearly warned about this, but in the face of accelerating mobilization, certain parts of the risk factors in the company’s prospectus are worth looking at again. Specifically:
Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results . . . We have historically not shown ads to users accessing Facebook through mobile apps or our mobile Web site.
In March 2012, we began to include sponsored stories in users’ mobile news feeds. However, we do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven . . . If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected.
These “intangible qualities” aside, then there’s the question of valuation. Facebook is trading at about 32x the average earnings per share estimate for 2013. Apple (AAPL)–yes, the same Apple that is about to pay a cash dividend–on the other hand, is trading at 12x–the average earnings per share estimate for 2013.
If you applied the Apple multiple to Facebook shares, you would get a price per share of about $7.70. I’m not sure why the market tolerates these imbalances. Regardless, I know I don’t have to, which is why I won’t buy Facebook, even at these prices.