MorningWord 7/24/14: Nothing To Poke Holes In – $FB

by Dan July 24, 2014 9:33 am • Commentary

Last night, Facebook reported a quarter that exceeded expectations on every metric and the stock is up 8.3% in the pre-market, surging to new all time highs.  There is no overheard resistance here, uncharted territory.  While I have not been a fan of the story, I would note that those looking to poke holes in the bull thesis due to valuation should save our breath.  There is a time where it will matter, but given its current execution and the market that we are in it does not matter now.  Trying to pick a top in FB is a fool’s errand. For regular readers of the site, I think many of you know just because we can be skeptical on a story for a whole host of reasons, usually the result of overzealous sentiment, we also recognize when we should not let our skepticism overrule better judgement.  In other words, skepticism does not always mean you have to trade.

Just like the inputs that go into a stock’s investment thesis are not written in stone, neither is stock market punditry.  Last night during CNBC’s Fast Money, when I was asked about FB up 5% in the aftermarket at new all time highs, I stated that I would not be chasing it here… and of course I am the dummy who has kept so many viewers out of the stock that I deserved to be called out.

Fair enough. I do recall saying a few weeks back that I would not be a buyer in the mid $60s, and I thought the stock had potential in the near term (under a certain set of market conditions) to be back in the mid $50s. And there I would likely be inclined to take a shot on the long side.

But let’s be clear, when one says they are not a buyer, but would be at lower levels, that does not mean they want to short it. Maybe this sounds a bit defensive but that is not the intent.  I have not traded anything in FB since back in March, where I caught a move from just below $68 to $61 in a matter of weeks with a defined risk bearish trade (read here).

I would also add that just this past Friday on CNBC’s Options Action, I laid out a bullish trade structure to play for new highs in the stock into and out of FB’s Q2 print:

Hypothetical Bullish Trade: FB ($68) Aug 65/72.50/80 Call Butterfly for 2.25

and stated in a post on the site (Name That Trade – FB: Poking to New Highs?)

on the heels of Google’s Q2 results, and the stock’s set up, it could be poised to make another run to the previous highs on the slightest bit of good news.  I would not be a buyer of the stock here, but here is a trade that I think would be very suitable for stock replacement from current levels, or for those looking to make an outright bullish bet with defined risk.

So the main point here is simple – as investors and/or pundits, we all have biases, some well founded, the others not so much.  But I have stated this 50 times in the last couple years – I am not a fan of FB’s products, since I believe their core offering today will not be nearly as popular in the not-too-distant future.  And at some point, if the company is not able to create entirely new revenue streams, valuation will become an issue… but not yet. Especially at a time where investors appear to be giving management more than the benefit of the doubt that WhatsApp will be a core feature of their future strategy, the $19 billion price tag still seems way off to me.

On the topic, a Bloomberg article by Mark Milian, Mark Zuckerberg Doesn’t Want to Monetize Messaging Yet. Here’s What He’s Missing caught my eye. I were a Facebook bull, the argument would certainly embolden me.  Excerpts:

So shareholders are inclined to believe whatever Zuckerberg has to say right now. With messaging, the CEO was adamant that Facebook would not “take the cheap and easy approach and just try to put ads in.” Zuckerberg said: “We’re going to take the time to do this in the way that we think that’s going to be right over multiple years.”

Zuckerberg did suggest that payments — an area Marcus is well-versed in — will probably be a part of the equation. This would be something of a new model for Facebook, which made 92 percent of its revenue last quarter, or $2.68 billion, from ads. But payments is the standard business model for messaging apps around the world, including the one Facebook just bought, and it’s looking to be a mega business


$495 million: WhatsApp had 500 million active users in April. Under the current business model, they should each pay the company 99 cents a year, totaling $495 million. However, it’s not that simple. People who joined the service prior to July 2013 were guaranteed lifetime subscriptions at no cost, so the total amount is somewhat smaller. Even at a half-billion dollars annually, it doesn’t justify the price Facebook paid to acquire the company. But the bet — echoing Zuckerberg’s comments about Messenger today — is on more users joining over time and on finding other ways to get their money in the future.

Pundits are people too. We can be wrong, and reserve the right to change our minds.  I am not doing that at the moment, but I can admit that despite reservations about valuation and the company’s future for existing business, they are executing very well.  Management has earned investors’ trust, and they have a plan.  That doesn’t mean I am a buyer of the stock.  But show me evidence of a future revenue stream that could equal that of their existing ad sales – then the stock will likely be something to buy on dips and own for years.