10/28/2013 5:00 PM ET|
Facebook may flop after earnings
The stock can't keep up this run for much longer — and investors who are sitting on big profits may be wise to sell now rather than risk steep declines.
Facebook (FB) has doubled in just a few short months, sparked by better-than-expected second-quarter earnings in July, and is up over 170 percent in the last year.
And while it's unfashionable to badmouth this social-media stock as it approaches its next earnings report, count me among the Facebook bears.
I think that even if Facebook manages to post decent numbers this week when it reports earnings, the stock can't keep this run up for much longer — and investors who are sitting on big profits may be wise to sell now rather than risk steep declines.
Here's why I refuse to "like" Facebook stock.
Facebook's most valuable users flatlining
The biggest reason to be bearish on Facebook is that domestic and European users have flatlined. I personally expect the company to post a decline in its U.S./Canada segment this quarter, or next quarter at the very latest.
That is not going to be a pleasant headline when FB sees its first-ever drop in U.S. users after its massive growth… just look at the fireworks in Netflix (NFLX) after its subscriber drop at home as a case study.
This is disturbing for obvious reasons in regard to the saturation of these markets and how it will affect growth, but it's even more disturbing when you consider that growth in emerging markets comes with only a fraction of the revenue.
Consider these figures from Facebook's last earnings report:
- Users: 198 million, or 17.1 percent of FB total
- Revenue per User: $4.32
- Users: 272 million, or 23.5 percent of FB total
- Revenue per User: $1.87
- Users: 339 million, or 29.4 percent of FB total
- Revenue per User: $0.75
Rest of World
- Users: 346 million, or 30.0 percent of FB total
- Revenue per User: $0.63
U.S./Canada is by far the most lucrative region by geography, with Europe an obvious second.
But consider that from the first quarter to the second quarter of 2013, Facebook grew its monthly active users less than 1 percent quarter-over-quarter, and year-over-year growth was a measly 6 percent.
In its second-quarter numbers, Facebook reported that $848 million in revenue — almost half of its $1.8 billion in total revenue on the quarter — came from users in the U.S. and Canada. So even a small rollback here is going to be felt, and the lack of future upside is significant.
The situation is the same in Europe as well. Europe's monthly active users increased just 1 percent from the first quarter to the second, and a modest 10 percent over the second quarter of 2012.
The Facebook longs better be sure that this user base is going to stick, or else they are in serious trouble.
Mobile and margins amplify the problem
The bulls may contend that the problem, then, isn't growing the Western audience, but simply monetizing it better. And, oh, by the way, if you make more money off those "rest of the world" subscribers, then it won't take quite so many of them to offset lost U.S. revenue if the users do roll back.
More from MarketWatch
Fair point. But Facebook is hardly in a great position to pull this off thanks to its big (and necessary) migration to mobile.
If you think it's easier to monetize on mobile devices vs. a desktop experience, then you haven't been paying attention to Internet stocks at all. Smaller screens categorically mean fewer advertising opportunities, lower rates and less user engagement with the content of those ads.
Want proof? Just look at where Facebook's ad money comes from. About 41 percent of ad revenue came from mobile last quarter, but 71 percent of its users were on mobile — 819 million users out of 1.15 billion total.
Similarly, a push into video may not be much of a savior for Facebook advertising even if it is a pivot from conventional display ads. Pre-roll video ads significantly reduce engagement with video across the Web, and for rates that may only be incrementally higher for Facebook when compared with current advertising options.
There are admittedly opportunities with Instagram advertising, but most analysts don't expect that money to materialize significantly until a few months into 2014.
And while the recent push with newsfeed ads shows that Facebook is willing to get creative with advertising in the meantime, the fact remains that Facebook is swimming upstream.
Facebook stock overheating
Michael Santoli recently reported "only twice in a generation — and probably only twice in history — has a company that started with a market value of at least $40 billion doubled within a single quarter, both times near the climax of the late-'90s tech-stock bubble."
That's quite a finding, and one to keep in mind.
I'm not saying that Facebook is going to get slashed in half overnight. But it's worth noting that after Wall Street breathed a sigh of relief in July to spark a big rally… the expert analysts out there set price targets that were met in a hurry.
Some of those targets were subsequently moved up, but right now the median price target on Facebook among 36 analysts surveyed by Thomson Reuters is $53.50 ... right about where Facebook stock currently sits.
And at a forward price-to-earnings ratio of over 50, there's clearly a big expectation for growth with no room for error.
Sure, institutional ownership will provide some stability; Fidelity Contrafund owns more than 1 percent of Facebook now, for example, and about 50 percent of shares are held by institutional or mutual fund managers.
And a big headline like an acquisition could certainly rejuvenate the bulls, as could nice growth in users that proves me to be a complete buffoon.
But in my opinion, the easy money has long been made in Facebook as it doubled from $25 or so to over $50.
This upcoming earnings report may not signal the end of the road just yet for Facebook's roaring run from the doldrums in the middle of last year, but the momentum is bound to end soon given the pressure on European and U.S. user growth, and the margin pressures from mobile.
So if you're sitting on a pile of money in Facebook, consider taking some of that off the table sooner rather than later.
More from MarketWatch
VIDEO ON MSN MONEY
Can someone put into 15 words or less how Facebook is going to make money in the future as the public hysteria over being on FB is quickly ramping down?
they don't have to spy, just look up the Fleecebook morons 'running' to give out their information, simply to be 'as famous as possible' sooooo pathetic! so let's summarize shall we: we've got new cars with 'black' boxes to 'spy' on your driving (oh right, that's just a few secs of info right before a crash, for ins. purposes, right) for a private car YOU BOUGHT! super! what else? IRS spying on people the regime wants to destroy, searching for their political affiliations or whatever....oh yea, smartphones that can be listened in on, new cars with Onstar type 'assistance' programs to start or switch your car off, that YOU BOUGHT, ah yes all that convenience.....and for what really? cuz you're too stupid NOT to lock yourself outta your car? cuz you need a restaurants location? or whatever....so you need some 'assistance' from some dude unlockin' your doors?? sounds cool, but it's outright frightening when you look at the big picture of things to come...
kinda frightening that anyone can just 'stop' you, switch your car off...and if you think that's not sign of things to come you're beyond stupid and clueless...how soon before the cops will have 'new car' transponder access on police cars to 'shut' you down anytime they want, how soon before 'very smart car thieves' will tap into that technology and have that info, follow you and 'shut' you off in the middle of nowhere and take your car, or kill you for it....yes, all this convenience frightening isn't it...should be!
oh yea and don't forget to get the Fakebook app for you stupid 'smart' phone so they can keep tabs on you aaaaaallllllll day, yea update your status, like anyone gives a rats azz...
facebook = myspace. soon, twitter will be the same, and something new will have come along.
face book management is scum of the earth. They run it like a militant government. Blocking me form adding friends because they determine i should not add someone.
Its a not really that great of a concept. Its on its way out. it will die.
The guy started off on shaky grounds with law suits and allegations, and it will come back to bite him in the _ ss
he is a scum bag and the site is diving in popularity.
I do not even have a real FB account any more. Just a fake one so i can go on every 1-2 months to check trends. I am in the IT industry.
its a dinosaur.
I still have a FB account but I am hardly on it anymore. I used to be on Fb multi times a day now once a week.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market began the new week on a cautious note. The S&P 500 lost 0.3%, but managed to erase more than half of its opening decline. Thanks to the rebound, the benchmark index reclaimed its 50-day moving average (1976.78) after slipping below that level in the morning.
Equities slumped at the open amid a couple global developments that dampened the overall risk appetite. Continued student protests in Hong Kong and a potential response from China weighed on the ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'