Yesterday, I posted an article about Facebook (FB) based upon the observations of a long-term investor, who remains loyal to the company and its management. His thesis was that FB, with its one billion users, will eventually be a huge success. But, what do investors want to see in the short run? I found a piece by Business Insider that has a different perspective about the fortunes of FB during the next few quarters.
BI says that we should look at the following three things as we assess the value of FB, and its corresponding stock price.
1. Ad revenues
Ad revenues are the lifeblood of this company, and the growth of revenues has been decelerating since 2011. The company did launch several products during the second quarter. The question is: has business picked up?
Wall Street consensus was that FB is revenues would be $921 million, a 6% growth rate over first quarter results, and 19% higher than the 2011-second quarter. According to BI, such growth is unacceptable, translation: at this level, the company’s multiple is way too high and so FB stock is overvalued.
The article indicates FB should be posting increases in year to year revenues of mid to high 20's, given that Google, which is much larger, reported a 21% increase in revenues. To not do so, it is reasonable to opine that FB has actually deteriorated operationally since the IPO.
2. The future of mobile
The future of mobile is still an enigma for FB and other related companies. In my article yesterday, the investor predicted that the mobile business model would work itself out over time. It has not yet for FB; keep in mind the company warned investors prior to the IPO that millions of users were primarily using mobiles to connect to the site, and mobile ad revenues are difficult to generate from advertisers. Has the company made any progress relating to its mobile operations? Investors really do not have a clue about this important aspect of FB’s business. If the company dodges questions about its mobile operations, it could create even greater consternation and force the stock price lower.
3. The outlook for the third and fourth quarters
The outlook for the third and fourth quarters is something investors want to hear about. It is doubtful that FB will forecast earnings per se, but an indication that the revenue and earnings trend lines are improving would be greatly appreciated. The fact is, FB will not maintain its current multiple if it does not post and/or predict a much greater growth rate for its business.
As you can see there are varied opinions about FB. Some analysts think investors should be patient and some demand short-term improvements. Tune in after the market closes for the latest in the FB odyssey.