This dated article may still be correct in valueing the Facebook shares lower than today's trading price of just over $21 - October 31, 2012 . Selling pressure is coming from locked up stock of employees coming available for sale. This is a technical problem for the stock price that can't be ignored - supply and demand......
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| MONDAY, SEPTEMBER 24, 2012
Still Too Pricey
By ANDREW BARY
Facebook has a business model in need of a radical change and a still-rich $61 billion market value.
What's not to "like"? Plenty.
Facebook's 40% plunge from its initial-public-offering price of $38 in May has millions of investors asking a single question: Is the stock a buy? The short answer is "No."
After a recent rally, to $23 from a low of $17.55, the stock trades at high multiples of both sales and earnings, even as uncertainty about the outlook for its business grows.
The rapid shift in Facebook's user base to mobile platforms—more than half of users now access the site on smartphones and tablets—appears to have caught the company by surprise.
Facebook (ticker: FB) founder and CEO Mark Zuckerberg must find a way to monetize its mobile traffic because usage on traditional PCs, where the company makes virtually all of its money, is declining in its large and established markets. That trend isn't likely to change.
Success in mobile is no sure thing. The small screens on these devices don't give Facebook much room to configure ads without alienating users. And the way that mobile users access Facebook, through applications on iPhones, iPads, and Android devices, may diminish the time users spend at the Website while handing greater power to Apple (AAPL) and Google (GOOG), which dominate the apps business.
Barron's Associate Editor Andrew Bary says to stay away from Facebook's stock, which is headed toward $15.
The transition to mobile and a generational shift in users has had an effect on the social network's advertising revenue. (Photo: AP)
What are the shares worth? Perhaps only $15. That would be roughly 24 times projected 2013 profit and six times estimated 2013 revenue of $6 billion, still no bargain price. Wall Street's consensus estimate for 2013 shows earnings rising 31%, to 63 cents a share.
That pro forma number is generous because it ignores Facebook's very significant stock-based compensation. The company has been issuing gobs of restricted stock to engineers and other key employees in the hot Silicon Valley job market to prevent them from being lured away to the next hot tech start-up—the next Facebook.
Facebook issued $1.4 billion of restricted stock in 2011, or nearly $500,000 per employee. So far this year, the company has doled out $1 billion of restricted stock. Facebook's reported stock-based compensation expense—based on the amortization of several years of stock grants—could total 20 cents a share next year. Subtract that from the 2013 consensus earnings number, and the shares trade at 50 times earnings. At $15 they would still be valued at a rich 35 times earnings.
TECHNOLOGY IS THE ONLY MAJOR industry where companies routinely encourage analysts to ignore stock-based compensation expense—and most comply.
This dubious approach to calculating profits is based on the idea that only cash expenses matter. That's a fiction, pure and simple.
As Warren Buffett has said, companies could take this to the extreme, pay all their expenses in stock and claim to have no costs.
Facebook's restricted-stock grant was so large last year that it may have exceeded its cash compensation costs. CEO Mark Zuckerberg seems to have a cavalier attitude, saying in a recent interview that "the way we do compensation is that we translate the amount of cash that we want to give you into shares" and give more stock to employees as the price declines.
Ours is admittedly an outlying view on the stock. Only one of the almost 40 Wall Street analysts covering Facebook, Dan Salmon of BMO Capital Markets, has a price target of $15. Most are in the high $20s or $30s. Many of these firms initiated coverage of Facebook with price targets in the $40s.
Barron's, it bears noting, never bought into the pre-IPO hype. Our take was that the stock looked very richly priced at $35 to $40 and that investors should consider Apple and Google instead. (Both are up about 25% since then.)
THE BULL CASE FOR Facebook is that Zuckerberg and Co. will find creative ways to generate huge revenue from its 955 million monthly active users, be it from mobile and desktop advertising, e-commerce, search, online-game payments, or sources that have yet to emerge. Pay no attention to depressed current earnings, the argument goes. Facebook is just getting started.
Facebook now gets $5 annually in revenue per user. That could easily double or triple in the next five years, bulls say.
Facebook's initial profit report in July didn't cheer Wall Street, as second-quarter revenue rose 32% to $1.18 billion while expenses, excluding stock-based compensation, were up 60%. The company projected similarly large expense gains in the final two quarters of the year, as it ramps up infrastructure and other undisclosed spending.
That surprised many investors who figured Facebook's business model was so powerful that it would generate operating leverage, meaning revenue growth would outpace expense growth.
The Street now projects that Facebook may not hit $1 a share in profit until 2015.
And that doesn't reflect heavy stock-based compensation. And who knows if that $1 a share estimate, which may require a doubling of revenue, is even achievable.
"I don't understand management teams that don't explain how they are going to spend shareholder money," says Michael Pachter, an analyst at Wedbush and a Facebook bull.
"Facebook is saying, 'Trust us.' Investors don't need to know about every pencil, but they want to know the strategy."
So far, Facebook has said little, and the company lacks the credibility and track record of Google, Apple and Amazon.com (AMZN).
FACEBOOK GENERATES almost 85% of its revenue from advertisements, much of it from ads on the right side of the screen when users visit the site on PCs. Ads are likely to remain its mainstay for some time to come. But in a troubling sign, last week online research firm eMarketer, after cutting its estimate of Facebook's revenue, projected that Google would top Facebook in online display-ad revenue this year.
Facebook conceivably could charge modest subscription fees to its users of, say, $1 a month and generate $5 billion or more of annual revenue, even with significant user attrition, but the company has ruled that out. "It's free and always will be," the Facebook log-in page says.
Facebook's chief operating officer, Sheryl Sandberg, has acknowledged the company's ad "challenge." On the July earnings conference call, she said, "That's mainly because we're a completely new kind of marketing. We're not TV. We're not search. We're a third medium."
An aging demographic isn't good with a youth-focused ad industry. Will young people continue to be attracted to a social networking site frequented by their mothers and grandmothers? Some of the decline in desktop usage is being offset by mobile access, but it's not easy to assess the combined impact.
IN COMING MONTHS, FACEBOOK'S share price could be depressed by significant sales by holders subject to expiring lock-up restrictions established at the time of the IPO.
Already, co-founder Dustin Moskovitz has sold 7.5 million shares, or 5% of his stake, and early investor and director Peter Thiel has sold 20.1 million shares, or 80% of his holding (see table, Major Insider Sales Since IPO).
Some 234 million shares (including options and restricted stock) become available for sale on Oct. 29, followed by another 777 million on Nov. 14. That's a lot relative to the current float of as much as 692 million shares, representing the 421 million sold at the IPO and another 271 million shares on which lock-up restrictions already have expired.
The total share count is 2.65 billion.
Even with the sharp drop in its share price, Facebook remains a richly valued bet on the company's ability to wring a lot of revenue from a huge and potentially fickle user base.
Source:
Facebook Is Worth $15 - Barrons.com
Link: http://online.barrons.com/article/SB50001424053111904706204578002652028814658.html#articleTabs_article%3D0
.......................................................................
| MONDAY, SEPTEMBER 24, 2012
Still Too Pricey
By ANDREW BARY
Facebook has a business model in need of a radical change and a still-rich $61 billion market value.
What's not to "like"? Plenty.
Facebook's 40% plunge from its initial-public-offering price of $38 in May has millions of investors asking a single question: Is the stock a buy? The short answer is "No."
After a recent rally, to $23 from a low of $17.55, the stock trades at high multiples of both sales and earnings, even as uncertainty about the outlook for its business grows.
The rapid shift in Facebook's user base to mobile platforms—more than half of users now access the site on smartphones and tablets—appears to have caught the company by surprise.
Facebook (ticker: FB) founder and CEO Mark Zuckerberg must find a way to monetize its mobile traffic because usage on traditional PCs, where the company makes virtually all of its money, is declining in its large and established markets. That trend isn't likely to change.
Success in mobile is no sure thing. The small screens on these devices don't give Facebook much room to configure ads without alienating users. And the way that mobile users access Facebook, through applications on iPhones, iPads, and Android devices, may diminish the time users spend at the Website while handing greater power to Apple (AAPL) and Google (GOOG), which dominate the apps business.
Barron's Associate Editor Andrew Bary says to stay away from Facebook's stock, which is headed toward $15.
The transition to mobile and a generational shift in users has had an effect on the social network's advertising revenue. (Photo: AP)
What are the shares worth? Perhaps only $15. That would be roughly 24 times projected 2013 profit and six times estimated 2013 revenue of $6 billion, still no bargain price. Wall Street's consensus estimate for 2013 shows earnings rising 31%, to 63 cents a share.
That pro forma number is generous because it ignores Facebook's very significant stock-based compensation. The company has been issuing gobs of restricted stock to engineers and other key employees in the hot Silicon Valley job market to prevent them from being lured away to the next hot tech start-up—the next Facebook.
Facebook issued $1.4 billion of restricted stock in 2011, or nearly $500,000 per employee. So far this year, the company has doled out $1 billion of restricted stock. Facebook's reported stock-based compensation expense—based on the amortization of several years of stock grants—could total 20 cents a share next year. Subtract that from the 2013 consensus earnings number, and the shares trade at 50 times earnings. At $15 they would still be valued at a rich 35 times earnings.
TECHNOLOGY IS THE ONLY MAJOR industry where companies routinely encourage analysts to ignore stock-based compensation expense—and most comply.
This dubious approach to calculating profits is based on the idea that only cash expenses matter. That's a fiction, pure and simple.
As Warren Buffett has said, companies could take this to the extreme, pay all their expenses in stock and claim to have no costs.
Facebook's restricted-stock grant was so large last year that it may have exceeded its cash compensation costs. CEO Mark Zuckerberg seems to have a cavalier attitude, saying in a recent interview that "the way we do compensation is that we translate the amount of cash that we want to give you into shares" and give more stock to employees as the price declines.
Ours is admittedly an outlying view on the stock. Only one of the almost 40 Wall Street analysts covering Facebook, Dan Salmon of BMO Capital Markets, has a price target of $15. Most are in the high $20s or $30s. Many of these firms initiated coverage of Facebook with price targets in the $40s.
Barron's, it bears noting, never bought into the pre-IPO hype. Our take was that the stock looked very richly priced at $35 to $40 and that investors should consider Apple and Google instead. (Both are up about 25% since then.)
THE BULL CASE FOR Facebook is that Zuckerberg and Co. will find creative ways to generate huge revenue from its 955 million monthly active users, be it from mobile and desktop advertising, e-commerce, search, online-game payments, or sources that have yet to emerge. Pay no attention to depressed current earnings, the argument goes. Facebook is just getting started.
Facebook now gets $5 annually in revenue per user. That could easily double or triple in the next five years, bulls say.
Facebook's initial profit report in July didn't cheer Wall Street, as second-quarter revenue rose 32% to $1.18 billion while expenses, excluding stock-based compensation, were up 60%. The company projected similarly large expense gains in the final two quarters of the year, as it ramps up infrastructure and other undisclosed spending.
That surprised many investors who figured Facebook's business model was so powerful that it would generate operating leverage, meaning revenue growth would outpace expense growth.
The Street now projects that Facebook may not hit $1 a share in profit until 2015.
And that doesn't reflect heavy stock-based compensation. And who knows if that $1 a share estimate, which may require a doubling of revenue, is even achievable.
"I don't understand management teams that don't explain how they are going to spend shareholder money," says Michael Pachter, an analyst at Wedbush and a Facebook bull.
"Facebook is saying, 'Trust us.' Investors don't need to know about every pencil, but they want to know the strategy."
So far, Facebook has said little, and the company lacks the credibility and track record of Google, Apple and Amazon.com (AMZN).
FACEBOOK GENERATES almost 85% of its revenue from advertisements, much of it from ads on the right side of the screen when users visit the site on PCs. Ads are likely to remain its mainstay for some time to come. But in a troubling sign, last week online research firm eMarketer, after cutting its estimate of Facebook's revenue, projected that Google would top Facebook in online display-ad revenue this year.
Facebook conceivably could charge modest subscription fees to its users of, say, $1 a month and generate $5 billion or more of annual revenue, even with significant user attrition, but the company has ruled that out. "It's free and always will be," the Facebook log-in page says.
Facebook's chief operating officer, Sheryl Sandberg, has acknowledged the company's ad "challenge." On the July earnings conference call, she said, "That's mainly because we're a completely new kind of marketing. We're not TV. We're not search. We're a third medium."
An aging demographic isn't good with a youth-focused ad industry. Will young people continue to be attracted to a social networking site frequented by their mothers and grandmothers? Some of the decline in desktop usage is being offset by mobile access, but it's not easy to assess the combined impact.
IN COMING MONTHS, FACEBOOK'S share price could be depressed by significant sales by holders subject to expiring lock-up restrictions established at the time of the IPO.
Already, co-founder Dustin Moskovitz has sold 7.5 million shares, or 5% of his stake, and early investor and director Peter Thiel has sold 20.1 million shares, or 80% of his holding (see table, Major Insider Sales Since IPO).
Some 234 million shares (including options and restricted stock) become available for sale on Oct. 29, followed by another 777 million on Nov. 14. That's a lot relative to the current float of as much as 692 million shares, representing the 421 million sold at the IPO and another 271 million shares on which lock-up restrictions already have expired.
The total share count is 2.65 billion.
Even with the sharp drop in its share price, Facebook remains a richly valued bet on the company's ability to wring a lot of revenue from a huge and potentially fickle user base.
Source:
Facebook Is Worth $15 - Barrons.com
Link: http://online.barrons.com/article/SB50001424053111904706204578002652028814658.html#articleTabs_article%3D0
