Facebook: From Headliner To Also-Ran

It's fairly well documented that the Facebook (FB) IPO opened to much fanfare with praise such as: "once-in-a-lifetime opportunity", "history in the making", and "it will make you money hand-over-fist". The masterminds on Wall Street priced it at $38, only to see it be cut in half a few months later to $19. I picked up a small piece of the action today for inclusion in my portfolio. This was not a spur-of-the moment decision.

Granted, the stock is in need of divine intervention to stop the slide, especially after the media firestorm of late. Out of all the bear articles I have read, Henry Blodget's piece was probably the most informative and well balanced. Both Mr. Blodget and ValueLine cautioned that until November 14th, more lock-up restrictions will expire with approximately 1.5 billion shares flooding the market. Things turned from bad to worse when board member Peter Thiel unloaded 72% of his remaining shares for a cool $400 million last week. Obviously the honeymoon period is over.

If we tabulate the earnings estimates, it's easy to see the stock is overvalued when compared to large cap technology companies like Apple (AAPL) and Google (GOOG). The average annual earnings estimate for 2012 is $.55/share. The high projection is $.76/share and the low is $.48. Just using the low estimate, we get a P/E ratio of 38. Apple and Google have P/E ratios in the mid teens. However, one thing that differentiates Facebook from Google and Apple is that it is a massive communications system. Sure, Google has Google+, but that is an upstart. Facebook is the proven leader.

Facebook is no longer a hot startup, but their 3-5 year growth projections of 27% indicates they still have a lot of mojo left. Where I think the anomaly is, and one of the reasons why the stock is under so much pressure, is the growth for the current year is only 14%. Going out to 2013, projected growth jumps back up to 28%. With anticipated earnings per share of $.63, you get a much more reasonably valued security with a P/E ratio of 30, which would give it a PEG ratio of one. Granted, this projects out 16 months, but analysts usually start utilizing next year valuations in the Fall.

One of the big knocks on Facebook is that they are primarily a desktop phenomenon, and can't monetize their mobile-phone application. That may be true for the last quarter, but in their first conference call, CEO Zuckerberg, put mobile as the company's number one priority:

As of the end of June, 543 million people were actively using our mobile services every month, each month. That's 67% more people than the 325 million who were using our mobile services just a year ago. We've also found that people who use our mobile services are more active Facebook users than people who only use our desktop services. On average, mobile users are around 20% more likely to use Facebook on any given day. So mobile not only gives us the potential to connect more people with our services, but it also gives us the ability to provide more value and a more deeply engaging experience.

The 543 million mobile users is hard scientific data. Facebook has the number one mobile app in the world. I think if you take the big picture point of view, you can see that there is tremendous opportunity for them in the mobile space.

How they go about doing it, is something that the CEO and his team are in the process of figuring out. They've done a terrific job of gaining digital dominance by building customer loyalty. My bet is that they will right the ship in regards to advertising on the mobile platform before the next conference call slated for the end of October. That's before the lockup period expires, which may stem the bleeding, if not propel the stock upwards.

However, I don't think they can do it alone. From doing extensive research in the mobile broadband arena, my preference is to see them team up with a digital-agency like Velti (VELT), or Millennial Media (MM). In 2010, Google bought Admob, and, Apple scooped up Quattro, which are both in mobile advertising. To the best of my knowledge, Quattro is only on the iOS platform, and Admob will have a difficult time in China because they are after all a Google company. Facebook is an international company with a mobile app that is platform agnostic. They require an advertising partner with similar credentials. Velti is the most globally positioned of all the mobile agencies.

Just going by Yahoo Finance analyst opinions, out of 22 brokers that cover the stock, $23 is the low twelve month target price, while $45 is the high target. Even if the equity rises to the $23 level by next August, that's a 25% gain. I'll take that in a choppy market, and that's the most negative outlook. I don't like to haggle over price too much. It's tough to pick a bottom. I believe that in a year from now, I'll be very happy with a $19 entry point. My investing style is to try and identify stocks that may double in two to three years. Facebook fits the bill.

This is when I like to buy recent IPOs, when they have sold off. It's one of the many teachings of Peter Lynch, one of the best value investors in the past 50 years. Nobody likes Facebook now. They bring a lot of baggage with them, but they still are the number one social Web site in the pixelated universe. Although Facebook needs a shot-in-the-arm, I believe it's coming sooner than later. Mr. Zuckerberg may not have the vice-grip control on the business he did two years ago, but he's the Chief Executive Officer - he writes the checks. It's up to Zuckerberg to make things right for a publicly traded company.

CEVA Fine Tunes Their Operation For 4G LTE

According to a recent presentation sponsored by Barclays Capital, CEVA (CEVA) is the world's leading licensor of DSP (digital signal processing) cores and platforms with a 90% market share. DSP essentially helps translate analog signals to digital and vise versa. Two other main engines in the cell phone are the CPU, brought to you by a company like ARM Holdings (ARMH), and the GPU for graphics processing, in which Nvidia (NVDA) excels.

The over-arching theme of my writings and stock selections since January 1st, has been in the wireless broadband sector. Anything to do with smartphones and tablets. My impression is that this a market worth cultivating, and in the next two to three years, may grant me a bigger paycheck. I'm primarily in small caps like CEVA to take advantage of the potential growth in a sector that is the driving force behind much of the technology expansion.

What I want to concentrate on is 4G LTE growth for CEVA. This is where the technology is going. Just look at all the television commercials we are being bombarded with by the likes of AT&T (T), Verizon (VZ) and Sprint (S). CFO Yaniv Arieli sheds some light on what could be a very profitable market, not just for CEVA, but their partners, too, at the Barclays Capital Conference:

"The next growth driver for us is the movement from 3G to LTE. Samsung, Broadcom (BRCM), Intel (INTC), Mindspeed (MSPD), all of these guys are using us not necessarily anymore for just cell phones. We have design wins in base station. We have design wins in smart grid. The volumes could be quite big in these markets, and if you look at the LTE subscribers today from 12 million anticipated to grow to north of 700 million over the next three years."

In addition, CEO Gideon Wertheizer discusses some impressive developments in 4G LTE in the latest conference call: "On 4G LTE, we continue to make progress in terms of customer attraction and design wins in this lucrative market. With the additional agreements we signed during the second quarter, we now have more than 20 LTE design wins with our DSPs.".

As semiconductors consolidate, CEVA is now moving into imaging, vision, audio and voice type of functionality. Battle lines are being drawn. This is because what was once a fragmented market is now solidifying, "...which is being driven by big OEMs vertically integrating and developing their own chips. This is evident in OEMs including Samsung, Apple (AAPL) and Huawei, integrating their own chips into their smartphone designs.".

The CEO goes on to say: "An example of this strategy coming to fruition is the strategic agreement we concluded during the second quarter with a Tier 1 OEM, who claims to use our DSP cores across a range of LTE products, ranging from mainstream LTE smartphone to next generation LTE advanced designs. For confidentiality reasons, we cannot elaborate more on this important deal at this time.".

When pressed further on this issue during the Q&A session by an analyst, CEVA's management didn't pin down an exact number of how many Tier 1 OEMs have licensed their LTE technology, but said it was in the range of two to three. This is great going forward, but LTE isn't expected to ramp up until late 2013, or the beginning of 2014. They need to pay the bills somehow, and that will be done via the already existing 2G and 3G initiatives.

Although in the most recent quarter, the 2G market experienced pricing pressure, CEVA's volume growth in the expanding 3G market during Q2 significantly outpaced that of the overall 3G space, as low and mid-range 3G smartphones gained traction, as paraphrased by Mr. Wertheizer. That's all well and good, but Wall Street didn't like CEVA's progress and the stock continued to trade near its 52 week low after the conference call. I took the opportunity to add to my holdings.

My median price for the equity is $19 (it currently sells for about $17). I originally bought CEVA at $22/share, and dollar cost averaged down at $15 when I liquidated my position in Sequans Communications (SQNS) two weeks ago. Both Sequans and CEVA are in the 4G LTE space, but Sequans has too many red flags for me to stick with it. With a much-needed cash infusion, and the thought of my assets being vanquished, I decided to part ways with the company. However, I will be monitoring it to possibly go back into it in 2013.

Although I like and own CEVA, a basic sticking point with the equity is that it appears to be overvalued if you look at the P/E and PEG Ratios. Sure, it's down almost 50% from its 52 week high, but the numbers don't lie. There's a lot of white noise in day-to-day investing with the barrage of information investors get from the numerous media outlets. I prefer to go year-to-year when doing evaluations, and according to Yahoo Finance, the measurables don't appear to be bargain basement.

Average analyst earnings estimates for 2012 are $.80/share. That's a P/E of 21. Extrapolating out to 2013, the average earnings go up about 13% to $.91/share. Next year's P/E calculates to 19. That's not a blue light special. If we examine revenues, sales for next year are only supposed to grow at 8.4%. Nothing to write home about.

So why would I want to be in a stock like CEVA? I like their prospects going out three to five years. I think I can double my money, if not more. Although reasonably valued, divinely ordained equities like Apple and Google (GOOG) have too big of a market cap to be included in my personal portfolio. Granted they have superior operating systems, but the law of probability, combined with the law of large numbers, may have caught up with these celebrity status stocks. Both companies are not quite long in the tooth, but not quite nimble enough to do anything more than double in the next couple of years.

Doubling your money is a terrific return for any investor, but I believe my best bet is to allocate my resources to their lesser known contemporaries. Stocks that may triple or more because of the success of Apple's iOS and Google's Android operating systems. It's a profitable arrangement for everybody betting on the sector.

With clients like Broadcom and Intel (INTC) licensing CEVA's technology, it is difficult to determine when the stock will get back in motion. However, with the upcoming release of the iPhone 5, all securities in the wireless sector may get goosed. I'd rather be early than late. My view is that investor psychology may play a big role in wireless broadband companies.

Velti: Baptism By Fire For A Young Company

Velti (VELT) is a young company in the nascent mobile advertising and marketing industry. Alexandros Moukas wears a lot of hats for the organization: Co-founder, CEO, Executive Director, and Chairman of the Executive Committee. I imagine taking a company from a bootstrap business to a publicly traded entity is a lot like parenting; no matter how much studying you do, there is nothing like on-the-job-training. Right now, Mr. Moukas is getting a real education in what it's like to be in the public eye of a backend loaded industry like Madison Avenue.

Traditionally, many advertising agencies and marketing departments allocate their yearly budgets in the late Fall, near the end of the calendar year when they know how much they have to spend for the next twelve months. As a result, Velti's earnings tend to be lopsided. Investors don't look long term in today's world. They're going quarter to quarter, which is why the stock price is under pressure. My impression is that if you are patient, you may very well earn a decent sum with this company. Full disclosure, I'm long the stock with my average price of $9/share.

Velti does more than smartphones. They are in the tablet market, too. In the next few years there may be six billion smartphones and tablets sold. That's a big universe. Smartphones and tablets are the heir apparent to feature phones, de facto communications tools, and you're going to need to send your marketing message to the end user somehow. Although Velti is on top of a very small hill, they are a globally positioned organization, and their platform can reach 4.3 billion consumers in more than 70 countries.

The stock has been in the limelight a few times in its short 18 month trading history, only to peter out and become persona non grata for a variety of reasons. In Q1 of this year, Velti sold off because Wall Street was concerned about receivables, or DSOs (Days Sales Outstanding), being too elongated. The Q2 DSOs were reduced from 272 days in the prior quarter, to 266 days. This area still needs improvement, but they are working on it by reducing a proportion of their business that comes from "legacy activities" in high-DSO areas. Velti is also executing internal process improvements to combat the problem.

Another reason why investors may have kept the stock at arm's length is the negative perception of mobile advertising by financial television pundits. I've heard from more than one larger-than-life commentator on CNBC that the ads on mobile devices are too small to click, unlike their older sibling, the browser banner advertisement. I disagree with this theory. By the sheer volume of smartphones and tablets being bought, you are going to get people engaging with the advertisements.

Looking at some of the finer points of Velti's Q2 conference call, my take is that individuals may be clicking on theses mini banner ads. Revenues for the quarter were $58.7 million, growth of 71%, compared with Q2 2011. Full year guidance for 2012 sales is $285 on the low side, and the high end is $296 million. Somebody is connecting with the advertisements.

Here are some of the takeaways from the analyst presentation as paraphrased by CEO Moukas:

• Velti experienced 126% year-over-year growth in Americas, primarily the U.S. market, in Q2. They continue to believe that revenue from the U.S. will double this year, making the U.S. their largest country by far.
• SaaS (software as a service) revenue for the second quarter of 2012 was $48.9 million, an increase of 78% compared with $27.6 million in the second quarter of 2011.
• Despite global macroeconomic weakness, the secular growth story of the mobile channels continue to trump the cyclical market concerns. They managed to grow their business in Europe by 30% year-over-year. It's somewhat hard to say what would that growth had been if Europe was growing by 2% or 3% a year. It would probably have been more but it's actually very hard to quantify.
• During the quarter, they signed new agreements with Disney (DIS) and Nestea. In addition they also signed incremental agreements with Toyota (TM) and Calvin Klein.
• Another major achievement in the second quarter was their completion of integrations of Air2Web and MIG. MIG continues to dominate Western Europe in high-growth areas, such as real-time mobile and social interactions, as well as mobile to TV interaction.
• The competitive landscape is quite fragmented, both in terms of services and geographies. Velti's customers seek great value in having one provider that can address the full gamut of mobile services rather than having to piece together multiple solutions to address their requirements.

Wall Street liked the numbers for the quarter, and investors boosted the stock price right after the analyst presentation. However, in my mind, it wasn't enough. Velti needs some sort of propulsion system to get the stock going again, and the accelerant may be a return to positive earnings.

If we examine Yahoo Finance average analyst estimates, Velti is projected to earn $.73/share for 2012. At its current price of roughly $7.20, that gives us a P/E ratio of 10. It's also projected to grow 34% a year the next half decade. This extrapolation includes 46% for this year, and 32% for 2013. Sure, if you are investing for the current quarter, earnings were nil. Q3 is projected to be a measly $.04/share, but if we go three months further to Q4, the bottom line jumps to $.72/share. This is not an optical illusion. Velti is like a powder keg with a four month fuse.

Traders may like the stock because of its volatility, and the fact that they can flip the stock for an instant payoff in January if indeed they do have a blowout fourth quarter. I like their prospects for the next five years, so I'm hanging onto my shares unless they get bid up to biblical proportions. I'm a firm believer that the mobile sector is going to become overvalued in the next few years, much the same way that cloud computing stocks became inflated right after the market meltdown in 2008/2009.

I think the Disney win is huge because they are a leading edge technology company which includes the ESPN family of networks. A big presence in the United States is also in their favor because this is where the majority of multinational corporations reside. If you are interested in doing business with Velti, or want to know more about their company, check out the Velti 2012 White Paper, prepared and presented by newly acquired MIG. Without bogging you down, it gives you loads of information on mobile marketing and advertising, plus some case studies of their clients.