Ah, Facebook (FB), Facebook, Facebook! You are a short-sellers dream. After CEO Mark Zuckerberg’s interview on September 11, the stock took a nice bounce out of the high teens and hit $23.37 a few days later. Yesterday it closed at $20.28 after Business Week announced it believed the stock was fairly priced at $15.00, but don’t blame the magazine for the price fall.
Despite Mr. Z’s enthusiasm and ideas for making Facebook profitable, nothing in the company’s business model has changed. Developing Facebook’s search engine capabilities, increasing their mobile ad business and developing their gaming platform sounds fine, but it’s just a rehash of past rhetoric. The problem is that people log into Facebook to socialize but they use Google (GOOG) and Amazon (AMZN) to buy, and unless Mr. Zuckerman plans on scrapping the current business model and redesigning it with a more business-like approach, Facebook stock will continue to drop. Adding to the downward pressure are the stock lockup periods expiring in October and November which will add 243 million and more than 1.2 billion shares respectively to the market.
Any company competing against Apple (AAPL) is in a world of hurt. When Apple made their interest in streaming music known on September 6, Pandora Media’s (P) stock price took an immediate hit and dropped from $12.57 to $9.95 the following day. Although the company’s financials have improved, it has yet to post a profit in any quarter. Pandora’s streaming music royalty payments are high, and the company doesn’t earn enough revenue to offset the royalty costs and meet their business expenses. The company posted a net loss of $5.415 million in second quarter 2012 and $20.228 million in first quarter 2012.
The company already competes against Sirius, Spotify and Clear Channel, and going head-on against Apple could see Pandora’s stock price drop further and see their market share start to erode. Pandora remains in business by using its current cash of $82.30 million to make up for revenue shortfalls, but sooner or later that cash reserve will run out. In contrast, Apple is sitting on a pile of cash ($27.65 billion) that increases quarterly and is earned from multiple revenue sources. Put simply, Apple can afford to host a streaming music feature that never posts a profit; Pandora cannot. Even in a good economy businesses caught in a downtrend can find it very difficult to turn things around, but a bear run can make it impossible. Until Facebook and Pandora are able to get their financial houses in order, they will remain great candidates for investors to short.