Monday, February 3, 2014

Facebook won't repeat its one-time gains

This week, Facebook reported record sales, record profit and a record stock price. For shareholders, this is the perfect time to sell.

The good news is that the company has successfully adapted its desktop ad strategy to mobile phones.

The WSJ summarized it thusly:

The social network accounted for 18.44% of the world-wide mobile ad market in 2013, up from 5.35% in 2012, eMarketer estimates. That compares with a climb to 53.17% from 52.35% for Google.

Mobile-ad revenue as a percentage of overall ad revenue climbed to 53%, from 49% the prior quarter and 23% a year earlier. This was due to the ongoing shift of ad dollars to mobile away from more traditional media and Facebook's ability to capture a bigger slice of the fast-growing pie.
The problem is, Facebook will not see that level of growth again. It got 3.4x share growth in one year, and if it were to do it again — today or in 10 years — that would mean a 63.6% share of the mobile market. That isn’t going to happen.

Facebook is perhaps the world’s most popular Internet application, but it’s just one product. Even including Instagram, those products are not going to capture a majority of a market that includes search, news and the rest of the WWW.

What of its other products? Instagram is doing a good job of segmenting the market — providing difference social media for different demographics — but not helping it gain new categories. Paper is innovative enough to lock-in millions of millennial eyeballs, but again, it’s not going to take over the world.

The reality is that most of the large tech companies are one-trick ponies, with their subsequent efforts never matching up to the original. Yes, Microsoft added Office to Windows, but beyond that? IBM took decades before profits from its services business matched that from mainframes. Only 21st century Apple had the ability to create multiple multibillion business, and with Steve Jobs gone, that won’t happen again soon (if ever).

Instead, I expect Facebook will be like Google and Intel, where the core business is what makes money and the other activities are (at best) in support of the core business and (at worst) a good way to waste money.

Facebook has a P/E of 104 (49.3 times 2014 projected earnings) vs. 32 (21) for Google. That’s a huge growth premium, which is only justified if these current levels of growth can be sustained for many years.

When the growth slows, they’ll get a Netflix-style correction. So this would be a good time for investors to lock in their wins, or at least take some money off the table.

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