Random Thoughts on Facebook Post-IPO - Too Easy to Call?

Over the last few weeks there has been enough debate over the issues surrounding the Facebook IPO that it could give the masses a migraine, but for some reason I am compelled to continue posting on comments sections.  Here are my two best posts below; one on WSJ via commentary on Mark Cuban's blog and the other through SeekingAlpha - I hope this is as therapeutic to you in reading this as it is for me to get these thoughts dumped out of my brain!

Basically my summary thoughts on Facebook are thus... :)

1. The IPO dip on open was due to a massive oversupply of shares and the NASDAQ technical glitch only worsened confidence - what was considered oversubscribed turned very quickly to oversupplied
2. Facebook can't monetize mobile... yet
3. Facebook will most likely hit lumpy growth due to reliance on advertising revenues... don't think investors will have patience with this
4. Facebook's P/E (including other recent social IPOs) is WAY to speculative, they held private investors hostage to now face public investors that aren't buying that there are enough bullets in the gun... at this value
5. Facebook WILL NOT BE MYSPACE... it is not going any where, but it will ultimately sit at a comfy $50-100B Mkt Cap over the next 5-20 years (unless there is a massive shift in professional content to Facebook or Facebook somehow makes new software that revolutionizes an existing market and decides to CHARGE for use)
6. Facebook needs to focus on monetizing SERVICES and less on monetizing content through ads

Mobility Issues

http://blogmaverick.com/2012/05/23/facebook-ipo-post-mortem-killer-but-not-for-the-reasons-you-think/

I love that to Cuban $1M in facebook stock is equivalent to a Mickey Mantel card… Regardless – he is right about the video transition to mobile stall. It is drastically slowing compared to the previous growth rate due to data restrictions placed by Service Providers… the real question is whether your ISP is willing to shell out to Cisco the billions of dollars required to build the right infrastructure in a down economy to bolster your Mobile Data Usage (e.g. video usage) and compete to give you less-pricey unlimited data coverage OR that you dip into your own wallet and pay hostage-like unlimited data monthly prices to pay for and make a profit on those upgrades. Either way its a ‘Share of Wallet’ issue more than a ‘desire’ issue to use video and mobile devices. The even bigger issue is the competitive one – Service Providers ARE IN THE TV BUSINESS, so they are asking themselves “why would I give ad revenue to my COMPETITION in mobile and web apps (e.g. YouTube, Netflix, & Facebook) at cheap prices only to disrupt that big steady flow of income, while I pay for all the technology infrastructure” (search the issues between Comcast and Netflix). Also they are fighting to create comparable mobile apps while not losing their partnerships with the major content creators and distributors (e.g. Hulu, Xfinity, Uverse, licensing through Turner Web). Right now the tentacles of the Service Provider is the lynch pin.

Facebook Valuation Snafu and Future
http://seekingalpha.com/article/640801-why-you-should-not-like-facebook

To believe that Zuck, LinkedIn, and Zynga all can live up to their grossly speculative P/E ratios is impossible over the near term.  History 101 - average P/E for top tier technology companies post-2000 and 2005 is 13 at best.  Companies with P/E higher than 13 have drastically under-performed the market because the companies struggle to meet growth expectations over the long term as their products, operations, competition, and customers mature.  Case in point, Cisco - was at one point valued at $557B (an obscene number at the time) at a P/E of 120.  Fast forward to today, the street has figured out how to value Cisco and the euphoria has passed - $88.5B Market Cap.  But here is the kicker - 12.2 P/E - Right smack dab in the sweet spot for a large cap tech leader.  Not to mention that Facebook is more NBC than it is Google - Facebook is an entertainment distributor that monetizes through advertising - it doesn't sell software (cause it's free) and it doesn't do a good job of selling services (RIP facebook deals - cruddy places, and other bad apps).  Facebook's only major competitive advantage is Connect - a bet for Facebook is a bet for universal ID - this is the secret sauce, Connect provides a simple and elegant way for mobile and web sites/apps to include a user's social graph.  It is revolutionary because of the 900M user base.  However, IT IS FREE - they can't monetize it.  If Facebook were smart, they would sell Connect as a service for something like $12 /yr, $1 /mth - instant re-occuring revenue at a cheap cheap price and nearly all of it will fall to the bottom line.  Facebook will not beat the Disney's of the world, but they can beat any open ID or Yellowpages - their biggest value going forward is as a connection point, not an ad platform.

Lastly some dramatized fun...

Your Full Attention

The Social Network — MOVIECLIPS.com

Until Next time - K

Google says $12.5B Hello to Moto... Mobile Faux Pas or Patent Envy

While we were all snug in our beds with dreams of iPhones and Andriods in our heads, Larry Page and Google's corporate development team were busy crafting the next day's (and perhaps the week's) major headline story.  In the ultimate +1 to Carl Ichan and Motorola Mobilility investors, Google announced its intent to acquire the group for a nice 63% premium at $40 per share.  The acquisition is billed as strategic in nature, stemming from the intensity of current patent brouhahas with the major tech consortiums of Apple, Microsoft, Nokia and the like.  While this seems to be clearly a case of "patent" envy, this may turn into a future mobile faux pas for the fashionable Googlistas.

The nuts and bolts of the deal can be broken down into a few basic categories using a standard mergers and acquisitions litmus test.  Let us evaluate briefly the merger's A list opportunities.  The deal earns mad props for kicking it straight old school by acquiring a business with actual profits and a means to generate them into the future.  I'm sure many investors will applaud Google finally grabbing a company that has immediate big impact to top line revenue and serious potential for cash and profits.  The move will further diversify Google's revenue mix and provides a launching pad for a Google controlled foray into hardware both for mobile and appliance.  But, this deal, so we are told, is all about patents.  17,000+ Patents that can stick their tiny little fingers in the dike to keep Andriod from a flood of litigation.  As such, we see a new valuable category of consolidation occuring in the marketplace... consolidation of the patent trolls or paying ample sums of cash to cross their patent bridge.  This deal immediately alleviates Google's well critized patent inventory and gives it plenty of ammunition to defend itself when the lawyers come servicing.

But, I'm not sure patents and revenue diversification are enough to justify a $12.5B cash purchase price.  When you consider that Motorola had already fully jumped into bed with Android for its line of smart phones, Google basically already owned the majority of search, mobile ad, and mobile marketplace revenues coming from those devices.  No incremental revenue above and beyond should be expected, bringing into question the rationale behind a 63% premium or roughly $6.6B.  Does the $6B come from fit?  Nope... Motorola is a hardware focused company that is arguably beyond its glory years of innovating products in the mobile space.  The last few years, they were at best struggling to gain market parity in mobile and if it weren't for Driod, Google might be buying those precious patents at auction today.  In addition, Google prides itself as an innovation factory in which creativity and healthy budgets abound.  Which makes it a particular struggle to pair penny-pinching value engineering cultures with free-spending innovation thought leaders.  The good news, Google has enough cash and free cash flow to keep funding the beast through integration and change. 

But, the most peculiar part of the culture issue is Larry Page's plans to run the group as a separate business.  It is a slippery slope to run Google and then have a red headed step child, Moogle, in the basement.  Without competitive help from Mama Google, Moogle will still face the same competitive pressures across the handset and tablet space that it currently faces and could be a significant drag on financials.  Google already has been critized for its spikes in OPEX and headcount, and as such, I wouldn't expect the "independent" Moogle to expect any free lunches or massages any time in the near future.  Also, Google's hardware forays have been weak to date, with struggling joint efforts for Chromebook, Nexus, and Google TV.  This doesn't bode well for the "separate" companies because the same design and collaboration hurdles will exist.

Surprisingly, Google has seemingly painted itself into a corner.  If they don't operate Moogle as a separate entity, then they risk ruining the precious channel partnerships for the product they spent massive bucks to protect.  Choose to compete and innovate and they could generate significant profits to combat Apple's growing war chest, but most likely push their ecosystem partners straight into the arms of MSFT.  Similarly, Google has justified the price with the potential of using the tech for Google TV and other lines.  However, service providers should be wary of Google's past plays at being the disruptor, while now probably playing the saint.  With wolves in sheeps clothing at every turn, expect the Comcast's of the world to be very sensitive to Google's every word.  One wrong step and punishment could be severe.

So with significant risks apparent in both its vertical integration claims and its seemingly night and day cultures, how does Google win in the end?  It doesn't need to do anything.  It already won with its purchase of the patent book, which fixes its short term issues and seemingly eliminates significant risk to its future.  Everything else doesn't matter, this was purely a "patent" play and as such Moogle better watch its back VERY carefully.  All the grand overtures and the lofty aspirations could, given the risks at hand, turn to rhetoric.  Sadly, Moogle might discover that rather than being the red-headed step child, they very likely are the family pig waiting to be slaughtered for a nice tax write off.  If given the game theory chance to choose between continuing to lock up a massive ecosystem or drive handset sales, Google probably chooses the 38 ecosystem partners over its new pet.  As so often happens with the Bachelor... in the end, Moto better pray they can bring more to the table than just a pretty patent book.

-K