Wherefores and Whys of Facebook Stock - Where it will end

(click for larger image -- Facebook stock chart this morning)

I'm taking off my geek hat and putting on my technical trader software guy hat and my entrepreneur hat, and will look at my favorite bête noire, Facebook. As I have so fearlessly predicted in these pages (HERE and HERE and others), Facebook stock is going to tank, and tank badly. Where will it end up? I am not afraid to make fearless predictions, and they usually end up near the mark. So I predict that Facebook stock will sink initially to the $14-16 dollar range. It will momentarily find some support there and then find its true valuation in $7-9 range. Remember you read it here first on August 2, 2012 when the stock price is pennies over $20.

So why will it tank may you ask, when Wall Street jokers like Arvind Bhatia say that it is worth the $38 dollar opening price? Either these buffoons were paid by the underwriters to say this, or they are hugely mistaken about what constitutes real value in business, and were enamored with the business play.

Facebook stated that because they have 900 million followers, that this is a huge unmonetized potential. I maintain that they cannot monetize this user base, because people do not go to Facebook to buy things. They go there to be social. It is like a hooker trying to sell her services in church. The French have a wonderful word: inaccrochable. It means "You can't hang it!". It's like trying to put up a Playboy centerfold in a kindergarten class. You can't hang it. Here's another example. If every time you met your neighbor on the street, he tries to sell you Amway, would you still be glad to see him on the street? Nope, in these instances, we just want to be social and not commercial. Facebook and Wall Street do not understand this.

But let's look at the pure business side of this. Zynga, the social networks games folks have tanked and lost 75 percent of its value. Groupon is limping like a ship pierced by torpedo in the hull losing 70 percent of its skin. Pandora Media's ship has plummeted to the depths of Davy Jones' Locker. What gives? It's the business side, stupid. What is the value proposition of these companies. Zynga sells you a $4 virtual cow. How big is that market and how long until you saturate the IQ-challenged market? The Pandora value proposition has disappeared because people don't want streaming -- they want to own the music for their iPods -- thanks to Steve Jobs. Groupon can't provide deep discounts in an economic downturn, because merchants need to milk every dollar from every person that comes through the door.

And Facebook? Let's face it. They are a Php driven website for desktop computers. They have missed the mobile market. They are brogrammers. They are not smart like the Google programmers who can spooge code down to the bare metal. They have missed their core value proposition -- that people want to connect in a lazy fashion with each other, and really don't want to shop while doing so.

So, I predict that unless Zuckerberg has the testicular fortitude to say that he was wrong and turn the Facebook ship 180 degrees, then they will continue their slide into oblivion.

What will the Facebook replacement look like, and how will it make money? Stay tuned.

Facebook's True Valuation, Stock Price and Capitalization

In yesterday's blog entry, I outlined why Facebook will never overtake Google. Most of the valuation of the company at $38 per share is based on unrealized, unmonetized potential. I argued yesterday, that the user base is near its limit of monetization, and gave reasons why.

So lets assume that one of the biggest fans of Facebook, Arvind Bhatia is right about Facebook's search capability. (I don't buy it, but let's go with it for the sake of argument). Bhatia says that Facebook's search capability is better than Google's and Facebook will monetize it. Nobody is better at monetizing searches than Google. They are the gold standard. They do it with less data on the searcher than Facebook, and they outperform Facebook by orders of magnitude in the revenue department.

Google currently trades at 19 times revenues. Facebook at $38 is 100 times revenues. If we say that Facebook is at least as good as Google, then it would be fair to assume that they also would trade at 19 times their revenue. That would make a fair share value of Facebook at $7.22 at share. That would make a market capitalization of $3.04 billion dollars instead of $16 billion.

Just for fun, let us double the fair market valuation to $14 per share because they have close to a billion in followers (although even Facebook admits that a fair percentage are fake accounts). That still is a long way off from $38 and $16 billion.

Facebook has a lot of potential to realize. I suspect that the Morgan Stanley and the hedge funds that bought Facebook did a lot yesterday to support the price at $38 a share in the last hour of trading. And the hedge funds are not going to permit the borrowing of shares to short the Facebook stock, so it may be kept up artificially for a while.

My own risk radar says that this valuation is way too high, and that Facebook will not fulfill its potential. There has to be a correction, like there was for Zynga that lost 13 per cent of its value on the same day that Facebook had its IPO. Ten percent of Facebook's revenue comes from Zynga and its Facebook games, so another red flag goes up.

The thing that really gets me, is that if a geek like me can see the obvious, why can't Wall Street and the pundits see the obvious? Are the financial markets so out of tune with reality, that players like Morgan Stanley and Goldman Sachs can tell us to believe what they say and not believe what our eyes and rational senses tell us?

Why Facebook Will Not Overtake Google

Last night I watched a video that interviewed a stock market analyst called Arvind Bhatia associated with the firm Stern Agee. He was quite bullish on Facebook, saying that it will overtake Google etc etc in advertising revenues once it monetizes the mobile market. It was quite obvious that he is enamored with Facebook and Mark Zuckerberg.

It reminded me of the tech boom that collapsed in 2001-2002. People were raving about waterfont property on the Internet, only to discover that it didn't exist. Facebook is now undergoing an IPO frenzy, and the opening price suggests that they are capitalized at 100 times their trailing revenues. For any other stock, this valuation would be sheer fantasy. Surely that if something is too good to be true, it is.

With the unbridled optimism of Wall Street, they are charging ahead, forgetting that one piece of exploding Muslim-fanatic underwear on an airplane can turn unbridled Wall Street optimism into deep despair.

As I was listening to analyst Arvind Bhatia, I was struck by a couple of things. He was demonstrating a zeal for Facebook that seem to transcend the rational practicality of most stock pickers.

Let's look at some aspects of Facebook and its IPO. First of all, the smartest stock picker in the world, Warren Buffett is not participating. This tells you something.

Secondly, Facebook says that they have a billion users, yet all they can garner is $4 per user per year. Facebook has not yet figured out how to monetize its users, and specifically it has not figured out how to do so without violating their privacy. Google has.

Bhatia the analyst says that Facebook has a lot of personal information that can be used to direct advertising to. While this is true, a lot of that personal information is not that useful in getting monetized. For example Bhatia mentioned that Facebook knows what high school that I went to. After many years of graduating, our high school displays the entire spectrum of graduates who have go on to greatness, and others that have gone on to jail. There is no smooth curve of socio-economic demographics to glean out of that kind of information.

When doing a comparison of Facebook and Google, Google has the upper edge. First of all, they have an order of magnitude of intellectual capital compared to Facebook. Facebook has a bunch of php coding freaks brogrammers. Put plainly, Facebook isn't smart enough to take their info to the next level.

Google has the smartest guys on the planet developing algorithms. There is a huge difference between the two. It is the same reason why in spite of the fact that China makes all of our stuff, they will never overtake us in development and innovation. All of the intellectual capital resides in the free universities and companies in America that are unfettered by dogmatic rules when it comes to science and thinking. The profit motive is a very strong innovation driver, especially when it is coupled to a strong research base. Facebook doesn't have a strong research base like Google does.

There is another problem with marketing and Facebook. Many of the top bricks and mortar stores have closed their Facebook stores. Why ? Part of the reason is that the information on Facebook is too open. Facebook blasts out the fact that you play Bejewel or that you were looking at the adult diapers page on Facebook. I don't want all my Facebook friends to know that. I carefully screen the pics that I put up on Facebook to show that I haven't gained 20 pounds, yet if I am shopping at the "husky" page, my friends will know. Liking the Viagra page will tell my friends that there is trouble in sex department. Looking at the singles ads will let my wife's friends know that I am checking out the menu. I don't want my godson to know that I am turned on by lithe, exotic dark skinned beauties on the Victoria Secrets page.

Facebook crosses too many personal lines. And they don't know how to fence that. Whereas Google deals with pure algorithms, Bayesian inference and data mining. I am reminded of the Target customer that sent a teen some pregnancy coupons based on extensive data mining of the fact that young pregnant women buy some sort of skin cream coupled with a renewed interest in health and vitamins. They had detected the fact that she was pregnant before she told her parents. Google has this capability and Facebook, the way that it is configured, does not. And trying to change Facebook, will be like trying to put lipstick on a pig and taking it to market.

The biggest factor is that everyone is stating that Facebook has unmonetized potential. And they put a high valuation on that. My contention is that the valuation of the user base is way too high. There is a common misconception that every user base can be turned into a marketing base. That is simply not true. The older folks on Facebook just find it an easy way to keep up with people that normally they wouldn't make the effort to do so. But in no way, will they buy anything off Facebook. What the analysts fail to realize, is that many people want a social network just to be social and not to shop. The valuations of the user base are overly optimistic.

So while the emotions of Wall Street may inflate the price of Facebook, I am reminded of what goes up must come down. They don't have the strong basics that Google does of pure substantiveness in their model, and if they anger enough people, Facebook will overnight become another MySpace. Facebook is particularly vulnerable to someone coming along and making something better that doesn't violate my privacy the way Facebook does. You can't knock Google off that way without a billion dollars to do some research and develop some better technology. And when the Facebook collapse happens, we will all wonder why we never saw it coming.