Facebook – gambling on the market’s short term thinking


If you don’t know what Facebook is, you have probably either been living under a rock; or on some deserted island.  Whether or not you use Facebook is another question – but the company proudly promotes having over 1 billion active users on the social media site helping to connect individuals (and companies) together.

At a Glance:
Symbol: US-FB
Price: $28.22
Market Cap: $67.3B
Yield: N/A
Me Wife Mom

Yesterday, Facebook announced first quarter earnings for 2013.  Highlights are:

  • Daily active users (DAUs) were 665 million on average for March 2013, an increase of 26% year-over-year.
  • Monthly active users (MAUs) were 1.11 billion as of March 31, 2013, an increase of 23% year-over-year.
  • Mobile MAUs were 751 million as of March 31, 2013, an increase of 54% year-over-year.
  • Revenue from advertising was $1.25 billion, representing 85% of total revenue and a 43% increase from the same quarter last year
  • Mobile advertising revenue represented approximately 30% of advertising revenue for the first quarter of 2013.
  • Excluding share-based compensation and related payroll tax expenses and income tax adjustments, non-GAAP net income for the first quarter of 2013 was $312 million, up 9% compared to $287 million for the first quarter of 2012

I’m a frequent Facebook user – facebook stalking multiple times a day.  Even if you aren’t a fan of Facebook, you’ve probably  heard about their $100B IPO about a year ago.

Facebook Stock Performance since IPO

Unfortunately for most investors who bought during the IPO, the stock has yet to get back to those heights.  These days, it seems like the new way of valuing companies is based on how many eyeballs you capture, then worry about how you get those eyeballs making you money.   Once  the IPO occurred, issues were raised around getting those eyeballs making money, and specifically around the  mobile platform – which contributed 0% of revenue – and the company losing more than half its value.  As I mentioned in my Baidu post, there’s been this big push to understand how companies will make money from mobile as surfing the internet on devices is becoming preferred over desktops.

In full disclosure, while I’m an avid user of Facebook, I’m not particularly excited about Facebook as an investment – yet.  Perhaps it’s this whole eyeballs and revenue model that I don’t get (I’ve never clicked on a Google or Facebook ad, nor has anyone I know) or that any standard valuation method shows Facebook to be ridiculously priced.  So why did I invest in the company?  If there’s one thing I’ve learnt through investing, it’s that investors tend to be short term thinkers – they want immediate results; and the stock reacts appropriately.

So, I gambled (maybe a term used for all investments) on the  market getting excited if Facebook  addressed their mobile deficiencies.  Mid-to-late 2012, Facebook was constantly asked questions around their ad capabilities and mobile platform – and could only say that they were investing heavily in developing those capabilities.  Facebook Exchange (the ad platform) had just launched and the first set of results were coming in.  Mobile was still being addressed and so I got a little lucky with the timing.

Instead of buying shares in the company, I invested in the Jan 2014 $20 call options [what’s a call option?] – this way, I would make some good money if all things worked out.  If they didn’t (i.e. FB wasn’t able to address the ad and mobile concerns), the stock price probably would’ve stayed flat (or lower) and my options would have expired worthless – but it meant I wasn’t losing that much money either way.  As it turned out, it looks like the market is very excited how  Facebook has addressed these concerns, pumping the stock up 50% in the process, despite some near misses on the earnings front.

I’m still not a believer yet – while it’s impressive that Facebook has generated $300M+ in mobile ad revenue when last year there were none;  revenue continues to grow at a 40% clip, and that 1B monthly users access the site –  they’re still investing a ridiculous amount of money in growing these platforms (sound familiar to Baidu?).  As with Baidu, I don’t mind making the proper investments – at least Facebook has shown results of these investments and introduced us to Graph Search and Facebook Home.  However, we’re unsure yet if these are really helping improve eyeball count and quality of eyeballs to Facebook; and more importantly those ad clicks.  Let’s also not forget the $67B price tag on the company (by the technical definition, Google and Yahoo Finance both have FB’s P/E at 1850!; Baidu’s P/E sits under 20)

At the time, it was a gamble worth taking, and so far, it’s turned out well.  Using the options also gives me 8 more months to evaluate how Facebook has been doing and if the growth is still there.  If the user base and ad revenue is still thriving and accelerating, I will probably exercise the options and hold onto the stock.  If the growth doesn’t justify the price and there are continued concerns around how to platforms generate revenue, I can always sell the option (at a profit or loss) when the time comes.


2 thoughts on “Facebook – gambling on the market’s short term thinking

  1. Pingback: Welcoming Back an Old Friend (ISRG) | Fearless Cal's Investment Journal

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s