|TheStreet.com, Summer, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
NEW YORK (TheStreet) — Forget about the bumbling of the IPO a couple of weeks ago and that fact Facebook (FB) stock is trading some 30% below its initial offering price.
There are some real signs that Facebook may be in real trouble and could turn out to be a disastrous investment. I wouldn’t call this piling on, per se. I would say that Facebook’s stumble out of the starting gate has given us all pause to consider the merits of the company in closer detail.
Overall the situation is starting to remind me of the old odd lot buy/sell ratio. This was a ratio used by Wall Street professionals to measure how much “dumb money” was coming into the market, and whether it was time to get out. The theory posited that odd lots, i.e. buys or sells of less than 100 shares, represented the activity of individual investors. Thus the ratio of odd-lot buys to sells would provide a measure of individual investor entry or exit from the market.
What I’m starting to get from the Facebook deal is some kind of equivalent for tech companies entering the market that represent a tipping point of sorts investors should heed. That is, when enough cockamamie ideas are peddled to the public as the next big thing, maybe it’s time to run for the hills. Here are some strategic considerations regarding Facebook that alarm me:
Straying: Remember when Apple (AAPL) went into the printer business, Quaker Oats bought Snapple, AT&T (T) bought NCR (NCR) or (and I’m giving away my age here) Exxon (XOM) was in the information technology business? To me there’s plenty of evidence that straying from your core business rarely delivers shareholder value. So reports about Facebook entering the smartphone business — unconfirmed by the company, I should add — is not doing anything to inspire confidence in me. It is, to put it bluntly, a crappy business in which Apple takes 75% of industry profits while most others spend heavily for a toehold in the market and practically give their phones away.
Invasive ubiquity: Remember when there were two operating systems, Mac and DOS, with Mac holding about 1% of the market while DOS or the early versions of Windows held about 99%? Microsoft (MSFT) was the most reviled company on the planet. What began with a 1991 Federal Trade Commission inquiry ended with a June 2000 court order to break up the company, an order averted on appeal. Today, Microsoft has escaped the public ire and the prying eyes of the justice department, while the once cool, now ever-ubiquitous Apple takes its lumps at home and abroad.
The invasive nature of Facebook’s advertising and now trending articles shows an alarming lack of appreciation for the implications of being too well-known among consumers and businesses and a surprising absence of deftness in managing its public image. When Facebook users hit the billion mark, maybe the company should play down the milestone rather than blaring the trumpets.
Missing the obvious: Though it was founded in 1889 and thought about nothing but photography for the next 100 years, once venerable Kodak somehow missed the digital photography revolution and now finds itself an historical artifact. Interestingly, one of the few assets the company has is patents, which it is trying to sell. Perhaps if the folks at Kodak had a little more appreciation for intellectual property early on, I’d be poking fun at someone else right now.
To me what’s painfully obvious is that the world is going mobile, while Facebook seems stubbornly affixed to the desktop, unable to make meaningful inroads into mobility. To wit, Mary Meeker — once the oracle of another dot-com era and now of venture capital firm Kleiner, Perkins, Caufield & Byers — pointed out that since 2009, mobile app advertising has grown at a compound annual growth rate of 153%. Facebook has failed to meaningfully address this trend. Look no further that this final risk factor from the company’s prospectus:
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 had 488 million [monthly active users] who used Facebook mobile products in March 2012. While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. We have historically not shown ads to users accessing Facebook through mobile apps or our mobile website. 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. We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users increasing more rapidly than the increase in the number of ads delivered. 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.
Well, at least it’s there in black and white, and no investor can say they weren’t warned. A famous anonymous phrase of the last Internet bubble was, “It’s different this time,” which was sage foresight at first, then, finally, the ultimate statement of hubris. I can say this much with confidence: It’s absolutely no different this time.