"The man who knows it can't be done counts the risk, not the reward"
-Elbert Hubbard
Welcome to The Golden Sense! I did something crazy the other day, I bought shares in Facebook. I did this as a speculation which is not something I regularly do. This is strange behavior for me. The thing is, I don't really like Facebook, but who cares about my feelings? I took on this speculation because their stock price just might be heading higher.
There are a ton of unknowns and challenges for Facebook. First off, Facebook used to be cool but not so much anymore. Typically this is the kiss of death for social networking sites. Remember MySpace? The current day teeny boppers have moved to others forms of social media and networking sites. They don't want to be on the same site as their parents and they certainly don't think it is cool when the talking heads at CNN chime in on their social networking site. The fact is, teen enrollment has been dropping and that is the number one concern for the future of Facebook.
Despite having a young enrollment problem, Facebook's stock valuation is through the roof. Facebook at present moment is overvalued by traditional standards. Their income doesn't really justify their stock price. The price to earnings ratio is at 106! Keep in mind that a normal price to earnings ratio should fall between 10 and 15. So a 106 P/E ratio is extremely high. On top of this the entire stock market is sitting at a very high valuation. This is the time when it's better to be a seller than a buyer.
Another issue I have is with Facebook's data mining activity. This means they collect every one's information and activity on an ongoing basis and use it for marketing purposes. This isn't even the bad part. The real kicker is that they sort through this information and forward it on to the government so they can track your location, behavior and beliefs. This doesn't sit well with me. On the other hand we have to remember, enrollment in Facebook is a choice. It's not mandatory. Since this is still the case, I can give them a pass rather than a kick in the face.
After looking at all the negatives there are still many positives. Facebook has been strategically acquiring companies. They are transitioning into a real business rather than just a website. Their potential is huge. They bought Instagram for $1 billion in 2012. Instagram is an online photo-sharing, video-sharing and social networking service that enables its users to take pictures and videos, apply digital filters to them, and share them on a variety of social networking services, such as Facebook, Twitter, Tumblr and Flickr. Instagram is extremely popular and it seems like almost everybody uses it.
Most recently Facebook purchased WhatsApp for $16 billion (or $19 billion by some measures). WhatsApp boasts 450 million users each month, with 70 percent of those users accessing the app each day. These are called platform plays from a business standpoint. It's about how many minutes a week or a day a customer spends on your platform. It's about attracting users, collecting data, and monetizing it to marketers.
It has become clear to me that Facebook has turned into the 500lb gorilla in the online communication industry. They're buying every cool new company and becoming the top dog in the market. This is the same strategy Oracle and Google used when they were growing. Now those companies dominate their market.
Facebook's stock was initially offered to the market at a price of $38 per share. This was at the high end of the valuation range. The IPO was one of the biggest in technology, and the biggest in Internet history, with a peak market capitalization of over $104 billion. The stock initially went up and then plummeted to $17 a share. At this time I was a hater. In fact, everyone was. Facebook was called a scam and lawsuits were filed against them and Morgan Stanley.
Time went by and the problems faded away. Over time the stock began to creep higher. In 2013 the stock shot up to $40 a share. Not many people noticed. Now it's at $69 a share. The rise in stock price is all about Facebook's potential. Facebook has access to billions of users and this is mouthwatering to marketers across the globe.
Marketing is about getting your brand in front of as many people as possible. Why do you think companies pay so much for super bowl ads? They know there are millions of people watching and it is a chance to show off their brand.
The question is:
Will marketing on Facebook and their affiliated sites work?
I'm not sure, but companies pay for marketing up front. It is my bet that Facebook will make money in the short term and this should drive the stock price even higher.
Who knows what will happen but it's still possible that Facebook could eventually become as big as Google. The potential is there and that's why I am ignoring the current valuations and the market conditions.
Since my initial purchase, I am already in the money. Yet, if the stock price falls I won't be hanging around for very long. There are just too many unknowns and I don't want to be stuck on a sinking ship.
Making speculations in the technology industry is alright to do sometimes. The payoff's can be enormous. Think about Apple, Google, Amazon and Netflix. All these companies have stock prices that have soared to sky high levels. One day Facebook could be right there with them. Who knows what the future holds, but you won't make money if you don't take the risk.
Over and Out
T. Norman
