"It profits me but little that a vigilant authority always protects the tranquillity of my pleasures and constantly averts all dangers from my path, without my care or concern, if this same authority is the absolute master of my liberty and my life."

--Alexis de Tocqueville, Democracy in America

Monday, May 21, 2012

Facebook and Fads

I have a Facebook page that I never use and never look at.   I suspect that I may be the last person who doesn't use Facebook -- supposedly there are 900 million users worldwide, which means just about everyone in North America and Europe and then a significant chunk of the rest of the world too.   So maybe I just don't get it, but why exactly would an investor bet on Facebook?  

Let's just look at this in the most basic way:  earnings.   Facebook last year had net income of $1 billion on revenue of about $3.7 billion.   According to its SEC filing in advance of last Friday's IPO, that worked out to $0.43 per share profits.  

Whoah, now.   43 cents per share.   That means that, at the initial offering price of $38, they were assuming that they could command a price/earnings ratio of about 90.   Now, I'm no Wall Street dandy, but back when my old man was first starting to buy stocks, the rule of thumb was that a P/E ratio of about 15 was appropriate for a good stock and anything much higher than that was overpriced and a pure speculative play.  

So the next question arises... can Facebook increase its profits so it becomes more of a real company and less of a speculative dream?   Well, to do so, they'd first have to increase their revenues.   How exactly can they do that?   What exactly is the product they're selling?   Access to personal information of dateable twenty-somethings?   I'm pretty sure that there's a price point at which young men and women with bills to pay and college loans coming due will say to themselves, "hey, maybe I'll just invest in buying that girl at the end of the bar a beer instead."   Say, more than $0.   So you're not going to sell the service itself.   Advertising?   Maybe... if people are looking at things a billion times a day, the advertising has to be worth something.   But people don't necessarily want advertising popping up next to their family pictures, so there's a limit to what users will put up with.   Mining marketing information?   Again, maybe... but won't people at some point balk at having their personal information sold to commercial users so that they can use it to bombard Facebook users with more targeted advertising or telemarketing?   Privacy lawers are already salivating at the class action potential.   And rent-seeking Democratic congressman want to have their names attached to the Facebook Privacy Protection Act.    

And shouldn't this worry investors?

Zynga accounted for approximately $445 million of Facebook’s total revenue in 2011.

“In 2011, Zynga accounted for approximately 12% of our revenue,” Facebook reported, “which amount was comprised of revenue derived from payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate a significant number of pages on which we display ads from other advertisers. If the use of Zynga games on our Platform declines, if Zynga launches games on or migrates games to competing platforms, or if we fail to maintain good relations with Zynga, we may lose Zynga as a significant Platform developer and our financial results may be adversely affected.”

This reads like Sterling Cooper's reliance on Lucky Strike... not good for long-term prospects.

Finally, the Regular Son, who is a technophobe of the highest and best order... he doesn't use his cell phone except to call me, doesn't email (except to me), doesn't text (ditto), doesn't play video games (a triumph of reactionary parenting!), doesn't "tweet," and doesn't have a Facebook page... told me the other day that he thinks Facebook is a "fad."   Just so.  

A decade ago they were making movies called "You've Got Mail."   That was AOL's tagline.   Wonder where that company is now?

Oh, yeah:

AOL stock went from $226 billion in 2001 to about $20 billion in 2006.
As of June 2010, AOL's subscriber base dropped to 4.4 million.
An AOL subscription was rated the "Worst Tech Product of All Time" by PC World in 2006 who stated that it had the "stigma of being the online service for people who don't know any better".

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