Sunday, June 10, 2012

Facebook: It's Good To Be King

Back in the early 1990's, a friend of mine had a message on his answering machine that went something like this: "This is the Thought Police. We know who you are. We know why you called. But get it off your chest, you'll feel better for it.". Even with the aid of biofeedback monitors, corporations are a long way from telepathy, but with social profiling, media customization is becoming the norm. Data aggregation organizations like Facebook (FB), Apple (AAPL) and Google (GOOG), force feed users tailor-made marketing messages on the digital format of the moment.

The company that has come up short on Wall Street's expectations in regards to advertising revenues is Facebook. This may be reflected in the poor performance their share/price since its IPO, but there are a multitude of reasons why the stock has tanked. I thought they were the odds-on favorite to appreciate in price like previous Internet IPOs such as Yahoo (YHOO) and Google, but that was not the case.

Retail investors made a mad dash to get first crack at Facebook with the kind of fanaticism that is seen in the Apple camp, only to be disappointed by an equity that was clearly overpriced by the underwriters. The only winners in the Facebook IPO were the lawyers and the short sellers. Even high-frequency trading firm Knight Capital (KCG) came hat in hand with a hard luck story that they lost $35 million on Facebook's opening day because of the botched listing.

Facebook founder and CEO Mark Zuckerberg presents a compelling case about The Social Graph, where everybody is connected to some respect, like in six degrees of separation. He may actually be right, but he hasn't monetized his company to its full potential, although he has developed the standard software infrastructure to make this happen. The table stakes are high for him. As a species, we are predisposed to taking risks, and Mr. Zuckerberg, the Pied Piper of peer-to-peer networking, has taken an extremely large and calculated risk by going public.

Zuckerberg has a terrific second in command in Sheryl Sandberg whose track record speaks for itself going back to her days at Google. He also has a board of directors filled with Silicon Valley veterans like Marc Andreessen of Netscape fame, and Reed Hastings of Netflix (NFLX). I don't know who is responsible for the IPO fiasco, but the company is a Zuckerberg production, so most of the blame rests squarely on his shoulders. A pop icon gets his photo op, but it was not a pretty picture.

I believe the network effect works both ways, so it's a pressing concern for CEO Zuckerberg to correct the mobile advertising problem PDQ. In David Kirkpatrick's "The Facebook Effect", Zuckerberg professed that Facebook would become a communications utility. Using media like e-mail would be like sending messages in Morse Code once he saturated the planet. Well, if he's not careful, Facebook may be valued like a utility company and have a single digit P/E Ratio. Look what happened to Yahoo.

During the run up to the IPO, Facebook was dubbed a category killer, and that may be true, so I'm going to give them the benefit of the doubt as a company. I think the higher-ups will right the ship. Facebook controls it's own destiny, and there is a lot at stake both financially and reputation-wise. Facebook didn't invent the immersive entertainment experience, but they've had a big part in spreading the gospel. This collective experience that Zuckerberg took to another level is not going away soon.

As of this writing, Facebook has 900 million registered users. Facebook bears like to point out that some of these users have duplicate accounts, and some are not of the demographic to fully embrace the service. I know I don't use it, but this is not about me. I'm at the tail end of the baby boomers. It's the Gen-X and Millennial demographic that can't seem to communicate with one another unless it's on a data-centric device. This is the coveted demographic that advertisers prefer to target.

Even if Facebook detractors are correct in their assumption that 900 million registered users is an inflated number, let's shave off 300 million just for argument's sake. You'd still get 600 million active and entrenched customers at approximately 13-40 years of age. That's almost double the population of the United States. We're not talking about selling Depends Adult Diapers or Phillips Milk of Magnesia to your average Facebook user, but clothes, cars and electronic gizmos. Somebody is going to effectively figure it out without alienating the end user by the constant bombardment of traditional advertising.

In 1995 Steve Jobs said, "The desktop computer industry is dead.". This may be taken slightly out of context, but you get the drift. The Facebook app is number one on both the iOS and Android operating systems. The perfect antidote to a very poor start as a public company would be for Facebook to utilize this application to its fullest potential. They own the digital landscape and can extract tolls from Madison Avenue. Not being able to monetize this treasure chest of assets is a liability. It would be nice to see a plan come together.

Let's see if you want a piece of the action. According to Yahoo Finance, the valuation looks fairly steep. I realize they have a short trading history as a public company, but Facebook has been bought and sold on the private exchanges for quite some time. Analysts have had an enormous amount of time to crunch the numbers. Out of the eleven analysts that cover the security, the average earnings per share is $.54 for 2012 with the highest estimate being $.76. I'll split the difference and call it $.64 to come up with a current year P/E Ratio of 42. Facebook has a projected 5 year growth rate of 36%, so you get a PEG Ratio of 1.2.

If you examine Facebook contemporaries like Google or Apple, you can get a much better bargain as far as valuations are concerned. Both of these technology heavyweights have P/E Ratios in the teens, with hefty growth rates, too. With Facebook, you're paying for potential, but it's already a large cap stock. Uneasy lies the head that wears a crown.

Monday, June 4, 2012

Doubling Down On Velti

It's sometimes difficult to make sense of irrational behavior, and I'm not referring to the 10% market correction we're experiencing. The market pullback is painful in the short term, but this is healthy for the indexes going forward, especially after a six month run-up. What I'm talking about is the current valuation of multinational mobile marketing operator Velti (VELT). Although the futuristic advertising agency is not slated to become profitable until the second half of the year, they've been hauled over the coals the last few weeks because receivables were deemed light by Wall Street during their last conference call.

When you look at Velti's numbers on Yahoo Finance, I don't think they look that bad. Average analysts' estimates for 2012 is $.73/share, and for 2013 it increases to $1.00/share. Velti lists at $6.75, which gives us P/E Ratios of 9 for this year and 6.75 going forward. This is very inexpensive for a stock that is slated to grow earnings at a 35% pace per year for the next half a decade. I'm not an outlier in my belief that this is an undervalued security. Here are some of the twelve month price targets of the analysts that cover Velti: Canaccord Genuity - $21, RBC Capital Markets - $19, Needham & Company - $20, and Jefferies & Company - $23.

In my last Velti posting, I gave a business description and discussed their brief trading history. The article touched on a lawsuit against Velti by Augme Technologies (AUGT.OB), and I really didn't go into it. This type of litigation is very common with technology companies, however, it has come to my attention that this lawsuit by Augme doesn't just target Velti, but also includes companies with deep pockets like Yahoo (YHOO) and AOL (AOL).

The suit alleges that Velti and other companies infringed on Augme's patents related to distributing targeted advertisements to mobile users on their ultraportable devices. Velti has five patents regarding online advertising, so Velti may counter, but this is just speculation.

I'm not suggesting this is a penny-ante scheme by Augme, but they are a very small player in the nascent viral communications industry where Velti has established a newfound global presence with their recent acquisition of CASEE, the largest mobile ad exchange and mobile ad network in China. Augme does the the majority of their business in the United States. The sun never sets on Velti with their international reach.

I actually think Augme Technologies would be a great acquisition target for Velti. Both companies do the complex backend processing to facilitate ads through the mobile Web, but Velti is a much, much larger company than Augme. Augme has the majority of the market share in the United States, but that's about as far as it goes. Europe, India, Brazil and China belong to Velti, and they are gaining ground in America. The economies of scale are against Augme, and as consolidation narrows down the field, they may get steamrolled by the competition.

One company that could be a suitor for either Augme Technologies or Velti is Facebook (FB). This idea didn't just pop into my head out of thin air, but came to me after reading a guest editorial Forbes piece by Velti's Chief Marketing Officer Krishna Subramanian. The article gives this industry insider's take on what Facebook should do to monetize their dominant mobile presence. Facebook is the most used app across both the Apple (AAPL) iOS and Google (GOOG) Android platforms.

Here's what Mr. Subramanian had to say right before the Facebook IPO: "Facebook knows it needs to succeed in mobile, and it is about to see its war chest swell by billions of dollars. Not much could stop them from simply partnering or buying up a highly successful mobile advertising company or platform to help create monetization success.".

Sounds like a business proposition.

My impression is that Velti would be a great partner with Facebook because they are both international organizations. Facebook is huge in both India and Brazil, and Velti has a presence in both countries. With Augme, Facebook would only be getting domestic exposure. Velti has that covered, too, with offices in San Francisco, New York and Atlanta.

Some companies just don't get this new paradigm shift to mobile and peer-to-peer advertising platforms. Facebook is one of them and they are the undisputed worldwide leader in social media. Go figure. I tip my hat to an organization like Ford (F) that is at the forefront of embracing the benefits of digital marketing. Not only do they effectively utilize Facebook, but they also teamed up with Velti to win the 2012 Mobile Merit Award of Excellence. The award is given to the best brand or agency in mobile marketing.

The advertising landscape is rapidly changing, and although traditional channels like television, radio and print are still an important part of a large-scale corporation's media mix, social and mobile should also be incorporated. An organization like Velti can make that happen.

Velti is not a new company, but it is a new public company, and they're experiencing some growing pains as they make headway mounting an offensive to increase their global footprint. My original stake in Velti was at $12/share, and I recently took another position at $6, making my average cost at approximately $9.50/share. As the gamblers so often say, "the only sure thing is that there is no sure thing", but my view is that with a sizable bet on Velti at $9.50, I'm going to make some money with this security in the next year or two.