Let’s face it,the past few weeks have not been kind to Facebook. Many of the market expectations got dashed recently when Facebook released its latest financial figures and the market not surprisingly punished the stock. Now Facebook’s stock has sunk to its lowest level since the company went public. Not only is Facebook staring at the barrel of serious financial growth challenges, but its stock is said to be rocked even before when the lock-in period of insiders, early investors and early employees expires in the next coming weeks. First, let us discuss the challenges facing the stock.
As we have repeatedly written earlier, Facebook’s greatest challenge is how to convert the fastest growing segment of its traffic base to generate ad revenues. The fastest growing segments of Facebook are users who view Facebook through mobile devices. However, if you check out Facebook through an iPhone app or an Android app, you would see that there is just not enough real estate on that small platform to accommodate ads. Facebook has rolled out the sponsored stories ad monetization program, but the jury is still out whether that is going to be the magic bullet that would milk ad revenues from its fast growing mobile space. The other challenge Facebook is facing is how much more could it grow.
Not only it is really facing two push-pull factors, how far forward can it push to get more users to visit Facebook and create accounts and use their Facebook account. There are just so many people you could theoretically reach and recruit considering the fact that in most developed markets, Facebook is reaching a saturation point while in the developing markets there are serious practical barriers for people to get on Facebook such as an internet connection, communications infrastructure or just even the basics of having a computer, smart phone or a tablet to begin with. If these growth constraints were not daunting enough, there is also another factor to consider, which is Facebook burnout. Not everybody who creates a Facebook account spends time on Facebook. There are many people that create Facebook accounts and just leave after a few days of usage. They just have better things to do.
Also related to this is just what percentage of Facebook accounts are made by real people and not software robots. There are many scammers and spammers using the Facebook network to push ads or to promote. Obviously these are not real accounts since they are created by software and managed by software, and how much of Facebook’s users are fake accounts. These are serious questions and they color how much investors or would-be investors should expect from Facebook. They paint a picture of how far this company could get and how much to expect from this company. Be that as it may, however many challenges Facebook faces, it may still be a great buy if you get in at the right price. For example, if the dread scenario of unlocked shares comes to past and many founders and early investors do decide to dump their shares on the market, this would obviously depress the price.
If the price and other bad news about Facebook comes to the surface and the stock price is pushed down to between $5 and $15, the price per earnings (P/E) ratio for Facebook might reach attractive levels and people might want to consider getting in. This stock has a lot going for it. Despite the serious issues discussed above, it does have a lot of potential. It owns the social network space. There is no other contender like it. Despite the fact that it is an ad-based platform, the fact that it facilitates influence creation, influence transmission and influence communication amongst a huge population of people cannot be overlooked. Maybe one way to look at the potential of this platform to make money is not as an ad platform like Google where you are looking for something, you go to a page and there are ads there, they are related and you click.
Maybe the dynamics just are not there. Maybe the way to look at Facebook is that of television station or cable TV program. Totally different dynamics, but the money is still there. It would be very interesting how this all plays out, but given the value, given the reach and given the brand, it would be foolish to completely at this stage of the game write Facebook off. We seriously believe that at a right price point, if certain factors come into play to make Facebook stock very attractive, at the right price point Facebook’s positive potential would outweigh the risks. On the other hand, at the current price level, the market obviously says that it is not worth the risk. At a different price point, the dynamic would definitely change.