Tuesday, September 4, 2012

Facebook: Can 543 Million Mobile Users Be That Wrong?

The big sport these days in the financial blogosphere is to kick dirt on Facebook (FB). In-your-face messianic ranting about including a do-not-resuscitate clause in their corporate charter can get on your nerves. After all, these were the same scribes that considered it a showcase trophy, the cream of social media not too long ago. Although there has been significant damage, to the stock and to the company, I believe this is a superficial wound.

I can understand some of the anger, but can't empathize or sympathize with individual investors that got taken to the cleaners. Investing is a risky game, even for experienced professionals. There were far too many stories of retail investors placing large bets on Facebook, hoping to make a killing, like it was 1999 all over again. Those days are over. I don't want to point a finger, but your money was hijacked by a Wall Street that for lack of a better word, is rigged.

Taking a more cautious approach, and investing from a value perspective is more my style. However, growth at a reasonable price is nice, too. I try to stay away from impulse buys, like recent IPOs, but sometimes from a fortuitous set of circumstances, I'll stake my claim. This is what happened last week when I picked up some shares of Facebook at $19.15. Facebook is not priced at bargain basement levels, but it also doesn't sport back-breaking valuations. For more information about Facebook's econometrics, check out my last posting about the company.

To fund my purchase of Facebook, I once again trimmed back shares of Glu Mobile (GLUU). I'm riding with Glu Mobile for a the long haul, but it's got a big fan base of day traders which inflates the price on occasion. I tend to trade this stock as well as keep a significant amount of shares for investment purposes. Recently, Glu Mobile started rising again, and didn't get too far ahead of itself, but I saw considerable short term appreciation potential in Facebook. I took the opportunity to put the money in the social media giant which could double in a year, if they get their mobile advertising business cooking.

Facebook has over half a billion active members utilizing their mobile application. It's the biggest mobile app worldwide. The problem is how to monetize those users. In a recent article about the lack of mobile advertising, reporter Mark Walsh writes:

One of the memes to emerge from Mary Meeker's influential Internet trends report this spring was that we spend about 10% of our time with mobile, but the medium only commands 1% of U.S. ad dollars. It's since become a rallying cry, in effect, for proponents of higher ad spending in mobile.
You can see that it's not just a Facebook problem. Most companies are trying to understand how best to reach the lucrative demographic of 15 to 35 year olds. Those are the ones that spend 10% of their Internet time with mobile. In my opinion, that percentage is just going to grow as tablets take market share from desktop and laptop computers.

Facebook is a phenomenon in the developed world. For instance, they have very little presence in China, just like Google (GOOG). Let's listen to what Fortune writer Karsten Strauss has to say in a recent post:

China is not afraid to be stubborn about which websites it allows its citizens to access. According to Wikipedia, over 2,600 websites are banned in the nation, including certain Google products, YouTube, Twitter and WordPress...While Facebook is being kept out of Chinese markets, two social networks operating within the “Great Firewall of China” have impressive chunks of market share: Renren (154 million users) and Sina Weibo (300 million users).
I believe Facebook will eventually have to be address this issue in both the desktop and mobile arenas. If they don't, they are ignoring a tremendously potential revenue stream. After all, Facebook's mission is total world dominance, and not generating significant sales from the PRC is going to hurt the top and bottom lines.

Although I'm investing heavily in the mobile sector, I don't use Facebook, or play the freemium games that Glu Mobile produces. It's more of an age appropriate issue. I'm not in the demographic that both these companies covet, but as they lay out their business plans, it's clear to me that their leading positions in mobile could boost my portfolio. Both of these companies have gotten off on the wrong foot since they began trading publicly. Glu Mobile is a turnaround story, and Facebook is the story of 2012. If both of these entities don't have significant upside a year from now, then I'm the dumb money.