MorningWord 5/28/13: $FB Needs Some New Friends

by Dan May 28, 2013 9:26 am • Commentary

MorningWord 5/28/13:  What the hell is wrong with FB?? I keep getting this question from pros and from Mom & Pop (not my my mom and pop, they still don’t know what it is).  On Wednesday’s Fast Money program (below) we highlighted FB’s ytd performance (now down 8.6% ytd as of Friday’s close ) which is massively under-performing the Nasdaq (up about 14.5%) and stocks like YHOO (up 32%), GOOG (up 23%) & even MSFT (up 28%).

Aside from just looking my usual handsome, I highlighted the fact that from a purely technical standpoint the chart was (and remains) particularly challenged when the stock was $25, and now looks to be testing a fairly important prior resistance level after last summer’s breakdown.

FB 1 yr chart from Bloomberg
FB 1 yr chart from Bloomberg

From a fundamental standpoint, fellow panelist, Josh Brown of the Reformed Broker blog, and social media maven mentioned the fact that the kids today are using FB less and less in favor of more micro blogging or focused sites like Instagram (which FB bought last year for $1b), Twitter and WhatsApp, which is has been a frequent topic in the media (here).

Back on May 9th when the stock was $27, I debated the formidable Guy Adami of Optionmonster on the merits of FB as a stock (I was the bear), but my main points were these:

Sent: Thursday, May 9, 2013 2:50 PM
Subject: Re: 5pm – New Street Fight – Facebook
1. Technically the stock is stuck in the mud, 1.75 billion shares outstanding, most every holder under water, who is the incremental buyer without a material uptick in earnings?
2. company has declining margins, declining revenue growth, increased competition from Google Plus, and losing engagement based on minutes spent on site
3. investors get excited for like 2 mins after they report 30% mobile ad gains QoQ, but then realize at the expense of desktop and such a small % of overall sales.
4. Zuckerburg is NO Steve Jobs, Page or Brinn, I think it is probably safe to say that we will see an Eric Schmidt sort of Exec running the show or this thing could go the way of MYspace.
5. May be a long time before it ever grows into current valuation, 35x expected 2014 earnings and 8x next years expected sales.

I guess my main take-away at the time was the overwhelmingly negative response to FB on Twitter as the viewers weighed in and were steadfastly in support of the Bearish view.  This struck me like a ton of bricks, based on my assumption that tons of retail investors still own the shares.   By no means is this story over, and I would suspect that a trans-formative acquisition, something like a knockout bid for Twitter would change investors psychology on the stock very quickly.

Full disclosure I don’t use their product, and never will but my kids, both under 10, have recently asked for Twitter accounts not Facebook. That is not a good anecdotal sign for future growth in the developed world.

Something has to give here and soon, and I suspect the stock will continue to trickle lower unless the company can create some sort of Killer Social App, not just maintain their lead in the soon to be Myspace-esque service.  If and when the stock gets washed out, back towards the previous lows, I would assume that would be a good spot to take shot, that Zuck and crew, who state they are taking the “Long View” will be able to right the ship.  I still contend though that a stock and cash deal valued in the mid to high teens for Twitter would like see the stock rally sharply, gaining much of the market cap put up to make such a deal.   IN the meantime it feels like a slow blood as the stock continues to see little incremental buy interest.