Friday, July 27, 2012

Updating Facebook Share Price

On May 29 we posted "Lessons to be Learned from the Facebook Stock Price Fiasco" and warned about the stock's future price action as well. The stock had gone public at $38, rose to $43 and then cratered the same day.

For the purpose of clarity, I have owned no Facebook shares, own none currently and don't intend to own any. May 29 the shares closed at a price of ~$29. They're selling for less than ~$24 per share today. Catching a falling knife is never easy.

In simple language, the company's share price is getting hammered again and there may be more bloodletting to come down the road.

My purpose is posting about this now is informational only. Sometimes we forget that risk goes along with reward, just as reward goes along with risk. And that emotions aren't good indicators of what to buy or sell, when to buy or sell, or whether to buy or sell, for that matter.

It's certainly not what Warren Buffett would tell us to do. (See post immediately below this one.)

Facebook Shares Hit New Lows as Mobile, Growth Concerns Linger has the details:

"Facebook Inc. shares on Friday traded at their lowest levels ever as the company continues its struggle to convince investors that it can leverage its immense popularity, especially on mobile devices, into revenue and profits.

In its first quarterly report, Facebook reported its slowest revenue growth in at least a year, a tripling of its costs and expenses, and a decline in some levels of user activity. Also, the company offered few specifics on future results and how it plans to profit from users spending more time on mobile devices, a trend that is less profitable for the social network. . . .

For its part, Facebook remains confident in its prospects, especially in mobile.

"Mobile is a huge opportunity for Facebook," Chief Executive Mark Zuckerberg said on the company's earnings call Thursday. "Over the next five years, we expect 4 billion or 5 billion people to have smartphones. That is more than twice as many people that have computers today."

Facebook ended the quarter with 543 million active mobile users, up 67% from a year earlier. Revenue from those devices has failed to keep pace, as the company only started selling significant amounts of advertising on the smaller screens. Still, the company said about half of its $1 million daily run-rate from ads on its Newsfeed came from mobile devices.

"We're investing very heavily in improving our mobile apps," Mr. Zuckerberg said, adding the company is just "beginning to demonstrate that we can advertise effectively within the mobile experience."

Investors are less certain. Facebook shares, which hit a low Friday of $22.28, recently fell 14% to $23.06, valuing the whole company at $63.2 billion. Both are now well-below the $38 stock price and $104.1 billion valuation from Facebook's initial public offering.

"Facebook's messy IPO and poorly-received quarterly debut as a public company," Wedbush Securities analyst Michael Pachter said, "will likely keep some investors away from the stock for the time being." . . .

"While we ultimately believe Facebook's business model should support attractive operating margins, at this early stage of our growth, investment is a top priority as opposed to managing for a target margin," Chief Financial Officer David Ebersman said. "Therefore, you can expect us to continue an aggressive pace of investment in [research and development] and infrastructure in particular."

My Take

I have no idea what Facebook's stock will be valued at in future years. It's a new company on a rapid growth trajectory.

My guess is it will do quite well over the years, but that's just a guess.

New companies are not ones in which I would tend to invest, other than if I happened to know the people involved personally. Too much uncertainty for me.

I'll stick with  a diversified portfolio of companies like McDonald's, Pepsi, Wal-Mart, Microsoft, Intel, IBM, Caterpillar, Boeing, GE, Honeywell, Wells Fargo, JP Morgan, US Bank, Merck, Pfizer, Abbott Labs, Exxon, Nucor, Whirlpool and other solid performers with a good dividend track record.

It's better sleeping that way.

Thanks. Bob.

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