Facebook (NASDAQ: FB) yesterday closed at $19.87 a share- its lowest closing price to date. That is far below its IPO price of $38 a share, which valued Zuckerburg’s empire at an eye-popping $104 billion. At one point during trading hours today, FB was as low as $19.69. Shareholders are losing confidence in Facebook and experts are predicting the share prices to fall even further as employees and early institutional investors start selling their shares. Is this going to be a death spiral? Was this all just a bubble?
Naysayers cite Facebook’s slowing growth and uncertainty of the Company’s mobile strategy as reasons to be bearish on FB, but I disagree. Facebook is till a very young company and it is far from its peak. The share price may decline a bit more (although theoretically this should be priced into the stock already) as lockups expire allowing insiders to sell, but FB will make a strong comeback in the next 24 months. There are numerous reasons why I believe this, but I will go over just a few:
1. Facebook will soon have more than a billion users. If information is power, Facebook is more powerful than most companies out there. Arguably, Facebook may have more personal data than any other company. While it hasn’t yet perfected targeted advertising, Facebook could still do a lot with this data. Plus, it’s not just about display advertising. For example, Facebook could personalize the user experience to provide a more engaging experience. When that leads users to spend even more time on Facebook, more commercial (i.e. monetization) opportunities will open up.
2. It’s true that Facebook hasn’t figure out mobile yet. As more people access Facebook from their mobile device (nearly 55% of its 900 million users), Facebook will need to run more mobile ads. Some worry that they may not be able to do this well without disrupting user experience. I disagree. In fact, click-through rate on Facebook’s mobile app is significantly higher than on desktop. Mobile ads can be even more targeted because Facebook can geo-target ads in real-time. If I am on my Facebook app walking near 2nd and Mission, it can send me a coupon to Peet’s. Now, you may be thinking, “Any mobile app can do that.” That’s true, but what’s unique about Facebook is that it knows so much about its users. It knows where they work, where they go to school, where they check in, and even where their friends check in. With some triangulation, Facebook could come up with a super accurate way to predict what ads its users would find interesting. It just needs to try different methods before getting it right. The potential here is enormous because mobile consumption is growing by the day. Just because Facebook hasn’t cracked the code yet doesn’t mean they won’t ever. They will. Soon.
3. According to Seeking Alpha, Facebook generates less than $5 in revenue per user per year. By comparison, Google makes $30 in revenue per user per year. As Facebook becomes better at attracting advertiser dollars through better advertising and with a bigger sales team, the large gap between Google and Facebook will narrow. I have no trouble believing that Zuckerburg and his army of engineers will eventually unlock the value of all the personal data its users have volunteered to the social network. Facebook’s shares should skyrocket even if Facebook can make $15 per user per year.
4. Netflix CEO and Chairman Reed Hastings recently bought a $1 million worth of Facebook shares at about $21 a share. Does he know something we don’t know? He does have a seat on Facebook’s board. When he sells massive amounts of shares of Neflix and buys nearly 48,000 shares in a company he doesn’t directly control, that is a sign of confidence. Check out his trades. Hastings may not be a hedge fund manager, but he does understand consumers. Perhaps he sees a future in Facebook that many Wall Street investors fail to see.
5. Facebook as a platform is just too enormous to fail. While social games’ dependence on Facebook is starting to decrease, the world’s largest social network is still the go-to place on which countless apps are built. Facebook will soon become a huge ecosystem where consumers and merchants transact and users go to for new and entertainment. As I wrote back in September 2010, Facebook will continue to morph into something much greater than what it is today. We are just seeing the tip of the iceberg.
Come back to this blog post 24 months from now. Let’s see if I was right to be bullish on Facebook.
By: Jonathan Lee