A few months ago, I put money into Facebook, buying at $19.99. I had made my case for owning Facebook over and over and would have been paid the IPO price. I didn’t though. I try to stay away from IPO’s. It’s too volatile, too risky. Instead, I waited a while and once the price seemed more stable, I purchased. There are many reasons why I was bullish on Facebook and I did start off doing very well with the trade. I was up 40% or so a few months later and things seemed promising on many fronts.
The Mood On Facebook Has ChangedThese days though, the news is not as exciting for Facebook shareholders. The stock is down to $23.55 and there are many reasons to question the social network. I have not considered selling and doubt it will be the case today as this is a very long term pick. I do look at such stocks every few months to make sure they still make sense and adjust my position if needed.
Points Of Concern-Facebook’s Status As The Leading Social Network: You could certainly argue that Facebook is not as dominant as it once was. Some will say that it’s because teens and others are getting tired of Facebook which is true. I would also argue that a big reason is simply the fact the fragmentation of social networks. Facebook, LinkedIn, Google+, Twitter, Tumblr, Instagram, Pinterest, etc. Increasingly we are using different social networks in different ways. As Sherly Sandberg said yesterday at D11, “Teenagers are using other things more. At the same time, they continue to very active, engaged Facebook users”. Is it bad news if Facebook continues to be the leader in an exploding market? I did write about the fact that Facebook might be forced into more acquisitions similar to Instagram. In fact, you could argue that it should have outbid Yahoo for Tumblr.
I think it’s also fair to say that while Google+ is no Facebook, it has done much better than I had anticipated. It remains relevant and perhaps increasingly so. Google is truly committed to making Google+ a critical part of its product offering and while I don’t see it as a threat yet, it’s not great news either.
-Overall User Growth: Yes, user growth has slowed but even when I made my initial case for Facebook, I never argued that user growth would be a driver of earnings. It would be a bad sign if things slowed down significantly but slower growth is more than fine with me. After all, there’s not as much space for growth left once you reach 1 billion users. What I pay much more attention to is how much time users spend on Facebook and in that regards, metrics remain incredibly strong so not a big source of worry to me.
-Transition To Mobile: Many argued that Facebook had a major problem because its users were increasingly accessing the network through mobile. I never got that. Yes, it created a short term challenge because those banner ads don’t work in the same way. Is that a challenge? Maybe. But having hundreds of millions of users accessing your site when they have free time is a good thing. Facebook has made a smooth transition and a growing portion of its earnings comes from mobile ads, mostly in the newsfeed. The negative feedback has been fairly limited.
A much more disappointing fact has been the whole Facebook Home fiasco. I do get that it’s just a start and that Facebook will likely improve its product in the coming months. You do only get one chance to make a good first impression and it’s safe to say that for Facebook and its first mobile operating system, it’s been a failure no matter how you look at it (ratings, reviews, downloads, etc). The only positive I see is that I did not even expect such a product to be released so needless to say that I was not “let down”. It is still a negative though because it does affect the perception of Facebook.
-Revenue Sources Diversification: This is by far the most disappointing aspect so far. From the start, I’ve said that Facebook’s future and potential did not depend on advertising. I believed other sources such as ecommerce, virtual currencies, and others could end up making an incredible difference in how much it can make per user. There have been very few signs of this happening. Yes, Facebook does offer users the opportunity to buy physical gifts but that is not nearly enough. I have not heard much about this either from Mark Zuckerberg.. are such ideas not being worked on?
Facebook Continues To Have PotentialI’m a bit more skeptical about Facebook’s upside potential than I was a year ago but I do think the potential remains there and do believe that being long makes a lot of sense. I will continue to monitor and adjust if needed and will of course keep you posted.
Disclaimer: Long Facebook (NASDAQ:FB)