Facebook keeps falling. So where is the bottom.
Bottoms are always hard to call, especially when the fall looks like the classic ‘falling knife.’
“Don’t try and catch a falling knife,” they say.
Facebook at $8 a share is a target of sorts based on a more normal valuation, say in line with Google, which after all is the bench mark of the internet.
At $18 a share Facebook is still a giant 10 times sales, with a p/e of 42.
Facebook is meant to be a major threat to Google because Facebook is the only other “front page” of the web that might drag ownership of browser traffic away from all consuming Google.
Monopolist Google is a massively powerful force as witnessed by the devastation caused by the Panda traffic grab of last year. When Google wants your business it can try to take it by competing or simply cutting off you natural search oxygen. So being a Google competitor is a dangerous position to inhabit.
Yet Google is not Facebook’s number 1 problem, in fact both giants share the same sinking boat. Mobile is draining the web. To the mass market, the mobile is the internet platform, perhaps not of choice, but of necessity.
The problem for both Google and Facebook is simply form factor. Mobile platforms don’t have the screen real estate to support the scale of advertising that a computer screen can.
If the mainstream goes ‘small screen’ mobile, it will be hard times for mainstream free services like Google and Facebook who rely completely on ad revenue.
Facebook’s problems run yet deeper. They do not have an advertising platform that monetizes.
Facebook’s advertising sales are dwarfed by Google, so while Facebook’s sales should be growing quickly towards the $40 billion Google drains from the web, this isn’t happening.
Facebook’s advertising platform simply doesn’t cut it.
So what will Facebook do?
They can and are surely are trying to re-engineer their advertising platform to make an offering as smooth and effective as Google’s. There is no doubt, Google’s Adwords service is a fantastic advertising system. It delivers ad performance that has chopped large chunks out of other media’s revenue by being better and cheaper. Adwords is so good it grosses $40 billion a year, over $100 million a day. The cost of acquisition offered by Google ads can’t be beat and in the end advertising is all about the ‘cost of sales’ of the advertiser. Google has that down.
Facebook doesn’t.
Facebook can’t really hope to catch Google ad platform through internal development. It has already proven itself weak. ‘Hiring and firing’ to get a new direction for their advertising offering would take too long to save the business from a further dramatic stock decline and there would be no certainty of the outcome either.
So tactically Facebook has to buy.
Google of course bought DoubleClick.
So this starts to look interesting, because it is all well and good being a naysaying smart Alec, but how to make money beyond ghoulishly shorting.
I only short companies I think are frauds, so I leave alone overpriced companies like Apple and stocks in trouble like Zynga and Groupon and for that matter Facebook. I’ll happily come back and go long on them if and when they bottom.
So the call on Facebook’s predicament is to buy stock in Valueclick, which I have done. I very rarely buy internet stocks because of their sky high valuations, but here is an internet stock with a “sensible” valuation. I use “sensible” from a value investor’s point of view of course; one not paid much attention to in the fashionable end of the US market. A p/e of 12 is attractive, a sales to price of 2, a mere 20% of Facebooks. Those numbers work for me.
Valueclick demonstrably can do advertising. They monetise a broad range of what most people would class as “low quality” inventory, the kind of inventory Facebook has. Facebook thinks it is “high quality,” but the advertising jury who might buy it, is still out.
Valueclick would be a perfect bolt on for Facebook, a running start at getting its advertising offering broader and adjusted.
It would also give the market hope that it was addressing its revenue problems aggressively.
Of course there is no reason why Facebook must buy Valueclick. It’s just a tasty speculation.
Yet whether or not Facebook comes knocking, Valueclick is a solid portfolio add.
The web is going mobile. Hurrah right. Wrong. This could mean the end of the internet as we know it.
No, not the end of the internet, just as we know it and we know it as FREE.
The future will be decided by the size of screens people will care to carry and/or how large screens can be, in a form function that is pocket sized.
If the market settles on a screen the size of the Samsung Galaxy S3, that will be bad news and the internet is going to be turned upside down. If an iPad tablet sized screen can somehow be accommodated, we can all relax, life will go on.
This is why.
Mobile phone companies do not pay for content. Mobile phone companies make you pay and pay big. They keep all the money, they do not give free stuff out beyond their schemes to lure you into paying, paying and paying.
Does anyone disagree?
So imagine a world where everyone is using the “web” on their mobile phones. How does the content get paid for?
The trouble is advertising doesn’t work, the screen is too small to carry anywhere as much money making commercials as a big screen. If we are all surfing the small screen, that content financing is going to dwindle dramatically. Free content is going to dwindle too.
Right now our bandwidth is bought all you can eat for full sized computers and consoles.
All you can eat mobile bandwidth’s future is looking shaky. The more web traffic transfers to mobile, the more bandwidth is going to be swamped. The days of free-riding look over.
Yet even if a spread of cheap omnipresent Wifi saves us from high mobile bandwidth costs, ‘small screen’ real estates is going to strangle advertising income and therefore content.
This means free stuff will dry up and subscription content will proliferate.
Old content people will love this and the pay walls will start to rise again.
People are used to pay on their mobile, but they aren’t used to pay on the desktop. The desktop browser paradigm is; stuff is free but the mobile paradigm is; you pay a ton for your mobile usage.
This means mobile is a potential saviour for traditional media because pay walls will work on mobile, especially if there is a painless payment mechanism. The “pay as you use” mobile user is habituated to the cost of the device, they will pay and pay, that appetite is proven.
Imagine a world where when you go to a website on a desktop machine, it says, “download our app to your mobile, … see ya later on your smart phone.” There is no desktop version for free, only a paid version on your mobile.
Imagine you want this content and spend 80% of your internet time on your smart phone and it is only a click to pay $3 a month for it. Why wouldn’t you click?
Why would that content provider put his stuff on www for you for free anymore?
Right now free, isn’t Free. A huge amount of content is paid for by advertising.
Advertising is a collective charge which amounts to a private sector tax. Take that away and content has to be paid for by direct purchase.
Unless display solutions rapidly expand the screen real-estate of mobile devices pay walls are going to rise at an explosive rate and the days of Dot-Communism will draw to a close.