$15 Facebook? Barron's is clueless

Does the publication really expect advertisers to shun a network that serves a billion users? Does it think CEO Mark Zuckerberg and his employees are idiots?

By TheStreet Staff Sep 24, 2012 9:18AM

TheStreet.com logoImage: Businessman reading newspaper, A. Chederros, ONOKY, Getty ImagesBy Rocco Pendola

                       

Haven't read Barrons for eight years.

 

That's the meat of a Jim Cramer Tweet from over the weekend.

 

Cramer posted that several hours after my Saturday morning routine commenced.

 

At 5:45 a.m., boom, boom, boom! Saturday is the busiest day at my doorstep. In succession, the "paper boy" slams The New York Times, The Wall Street Journal and Barron's against my door. Moments later, I flick crust from the corner of my eyes, open the door, stretch, yawn, breathe in the ocean air and pick up each publication.

 

The front cover of Barron's says, "Facebook is worth $15," flanked by something incredibly creative from the graphics department, a thumbs-down pic.

 

Most of the story reads like the final term paper in a freshman finance seminar:

AT ITS CURRENT QUOTE, Facebook trades at 47 times projected 2012 profit of 48 cents a share and 36 times estimated 2013 earnings of 63 cents. Compare that with Google and Apple, two proven technology growth stories, which both trade for about 16 times estimated 2012 earnings. Facebook is valued at $61 billion, or $53 billion excluding its estimated $8 billion in cash. That's more than 10 times estimated 2012 revenue of $5 billion. Google trades for half that valuation.

A wholly unoriginal argument: Investors should not value Facebook (FB) higher than Apple (AAPL) and  Google (GOOG). Kudos to the author, Andrew Bary, though, for not making obligatory mention of Amazon.com's (AMZN) price-to-earnings ratio.

 

Barron's goes on to lament Facebook's practice of issuing loads of stock as compensation. The author then almost solely rests his bear case on the tired notion that there's no guarantee Facebook can figure out mobile. And, even if it does, the platform for mobile ads is too small to serve effective advertising. As such, done deal, FB is a $15 stock.

 

Channeling Bob Dylan: "Don't criticize what you don't understand."

 

On these main criticisms -- stock comp and mobile -- Barron's gives us surface-scratch reflections with zero vision and no grasp of the here and now. The paper fails to show even the slightest comprehension of the complex world Facebook lives in as well as the one it's helping create.

 

Yes, Facebook doles out stock to keep employees from moving elsewhere. Barron's pegs the cost at $500,000 per employee, projecting the company's stock-based compensation expense will account for 20 cents per share next year. (I reckon Barron's was fast and easy with the numbers to get that $500,000 figure. Somebody needs to let them in on concepts such as average, median and outlier).

 

And it's been confirmed. Mark Zuckerberg said it himself. Facebook wasted two years on mobile. We already know this. You're not calling the company out by repeating it as if it's news.

 

Mobility -- it's the keyword here. And Barron's doesn't get it.

 

Mobility in the workforce. And the epic migration from desktop to mobile in social and new media.

 

Today's workers, particularly in tech and related sectors, don't take a gig with a company, stay there 35 years, collect a pension and live on a fixed income in retirement. In this world of LinkedIn profiles and hyper-networking, folks in tech are always looking for a job even if they're not.

 

It's so competitive that companies such as Facebook -- likely a popular target for headhunters -- have no choice but to get aggressive -- and creative -- with compensation. There's no better way to entice people than with stock. They're not sticking around for the free lunches, 401k and San Francisco rent control. That stuff means nothing to cats making $80,000 (or more) plus options straight out of college.

 

It's so much more complex than the Barron's article makes it out to be. They paint Facebook as irresponsible yet make no mention of the type of talented high-demand worker they must attract and maintain. Of course, when an executive or other key employees leave, the bears squawk. It's a contradiction these bears are likely not even conscious of.

 

To dog Facebook for its slow mobile transition shows a profound ignorance. I would love to waste two years and still be, according to eMarketer:

  • Sixth in 2012 mobile ad revenue, slightly behind Apple.
  • Projected to catapult to second, between Google and Pandora (P) in 2013 and 2014.

A company that has self-admittedly neglected mobile ranks behind only five others in ad revenue. Logic tells me that with a massive user base and a new focus on mobile throughout the organization, Facebook's mobile revenues have nowhere to go but up.

 

Does Barron's really expect advertisers to shun the social platform that serves a billion users around the world? Does the publication believe advertisers will not go where their prospective customers are? Do they think Mark Zuckerberg and the people Facebook hires are complete and total idiots?

 

Facebook might be setting up the ultimate bear trap. While you can spin its policy of not giving guidance as a negative, it might turn into a positive for longs. When mobile gains traction, it will seemingly come out of nowhere. That's a bear trap in the making.

 

While the stock could dip on the noise Barron's creates and insider selling, instead of a $15 stock price, I anticipate around $15 worth of upside as Facebook's mobile strategies continue to take shape into 2013.

 

More from TheStreet.com

10Comments
Sep 24, 2012 11:07AM
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And we should trust the wisdom of cramers shills over a leading financial institution like Barron's -- why of course.

cramer et al have given us some nuggets like -- "stay out of the markets if you need the money in the next 5 years" this was when the DOW was at 7700 or so --- nice call from the genii at "the street"

 The fact that cramer does not read barron's is no shock as most of his ideas seem to stem from his nether regions.

And after all the panning of barron's metrics here the author tells us he  "anticipates" around $15 worth of upside.....no metrics or figures needed here !!
Sep 24, 2012 11:10AM
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So onto FB .....zuckerberg tells us they are going to get it right on mobile (after 2 years of getting it wrong) --- they brag about the click throughs for sponsored stories.

Has anyone seen buy rates from sponsored stories?  No - the reason is there probably is nobody buying anything from these stories.

Also are you will willing tp pay the data costs for FB to push ads to your phone? Data is not free yet on most cell phone plans.

And finally sponsored stories decline in interest exponentially as people realise they are looking at ads. Almost everyone I know just blows past them when they are used in magazines.
Sep 24, 2012 10:51AM
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FB's worth what the next persons willing to pay for it.
Sep 24, 2012 1:37PM
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And why should we accept the 950 million number as absolute -- most teens have multiple account, a number of accounts are inactive and also how many are in 3rd world countries where there is NO disposable income and therefore NO value to advertisers.....

Let's get some real numbers around this thing before blindly trotting out anecdotal evidence.
Sep 24, 2012 4:03PM
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"That stuff means nothing to cats making $80,000 (or more) plus options straight out of college."

Sammy Davis Jr is alive !! Woo hoo !!
Sep 24, 2012 3:59PM
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"but that is still a very attractive number to advertisers."

Only if they buy and I repeat who on earth would pay their mobile carrier for fb ads.....once advertisers realize there is no ROI they will bail --- if you doubt me ask all your friends and family have they EVER PURCHASED any thing from a FB ad.  I bet you will find virtually noone.

Also many of the overseas accounts are just created to try and scam people out of money.
AOL,MYSPACE, FRIENDSTER, etc  are the payphone builders of the 80s.

The only way fb et al will ever make money is to charge subscriptions and they will not do it.

Sep 24, 2012 2:58PM
avatar
The Fed is inflating asset bubbles, so it's very difficult to gauge the true worth of any company. In my very humble opinion, the social media space is wildly over-valued, though I won't say that FB in particular is. There will certainly be a painful consolidation over the next few years, with some of today's high flying social media companies going bust. We're all getting too "social" for our own good. 
Sep 24, 2012 2:57PM
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The 950 million number is reached by monitoring active accounts, meaning the users log on at a threshold of a certain amount of hours per week and 'click'  (move) around the site visiting multiple pages.

 

Though many of those accounts may be duplicates, advertisers don't care.  Anything that moves on the site, they want to sell to it.  When facebook flaunts that 'billion' number, it is assumed that the 'ghost' accounts, (those with little to no activity) are discounted.

 

I would assume that the actual number of individual active users on the site is closer to 700-800 million, but that is still a very attractive number to advertisers.

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