Disclosure: I am short FB.
A couple of news items were released last Thursday that highlighted the short thesis in Facebook (FB). First, the company released news regarding hitting 1B monthly active users (MAU). Though initially sounding bullish, the number highlights the slowing growth trajectory. Second,Zynga (ZNGA) warned of reduced growth going forward, suggesting a considerable reduction in Facebook-related revenue and usage.
Also last week, CEO Mark Zuckerburg made the media circles with anappearance with Matt Lauer on NBC and a Businessweek interview. The interesting take away from both interviews was the focus on MAU. For some reason, these media outlets didn't press the issue on the reduction in usage reported by comScore or the lack of focus on daily active users (DAU).
The company can add millions of new users, but if the old users drop off as comScore suggested, the stock will not maintain this lofty valuation. See more details below and the original analysis from the previous week.
Zynga Warning
While Zynga reported higher Q3 revenue than forecast, the company guided down for the rest of the year due to reduced expectations forThe Ville game plus delayed launches of other games.
The company's updated outlook for full year 2012 includes:
- Bookings projected to be in the range of $1.085 billion to $1.100 billion (compared to previous expectations of between $1.150 billion to $1.225 billion).
- Adjusted EBITDA projected to be in the range of $147 million to $162 million (compared to previous expectations of between $180 million to $250 million).
The most concerning issues for Facebook is that Zynga is cutting back on the R&D pipeline while continuing to invest in mobile. Quote from Mark Pincus, CEO and Founder of Zynga:
"We're addressing these near-term challenges by implementing targeted cost reductions in the fourth quarter and rationalizing our product R&D pipeline to reflect our strategic priorities. At the same time, we are continuing to invest in our mobile business where we have one of the strongest positions in the industry. These actions support our strategy to transition from being a first party web game developer to a multiplatform game network."
Payments Revenue
Based on the Zynga news, J.P. Morgan cut the 2013 revenue target for Facebook's Payments unit to $582M from its previous estimate of $797M
Prior to this warning, analysts expected $6.3B in revenue for 2013. This $215M revenue cut would place the reduced average around $6.1B if every analyst made a similar cut.
While this unit only accounts for roughly 12-13% of the original revenue estimates, the revenue cut makes it difficult for Facebook to maintain a high growth rate. Not to mention, this announcement by Zynga further highlights a move away from focusing on Facebook as a platform, further reducing usage.
ComScore
ComScore reported last week that Facebook again saw declining usage of its service in August. With the stock valuation held up with the promises of mobile monetization, a new search tool, and the eventual ability to mine all the data collected on users, the market appears to be missing that the company has lost all momentum.
Forbes provided the following summary on the comScore data:
- Mobile users rose 4% sequentially to 90M in August.
- Mobile average daily visitors were up 6% sequentially to 52M, while average minutes per user rose to 3% to 517.
- Total minutes fell by 5% from July to 108B.
- Desktop minutes dropped 13% to 61B.
- Mobile usage now accounts for 43% of total minutes or 47B.
- Desktop unique users were up 9% year-over-year, but down 2% sequentially.
As pointed out in the previous article, the total minutes declining should be very alarming. The fact that the interviews didn't address this issue was disappointing.
IPO Lockup
In the next couple of months, over a billion shares will come off the IPO lockup period. In fact, 234M will hit the markets on October 29th.
This allows employees and private equity investors to unload shares if so willing. The moves will be telling with the stock languishing at $20. If the insiders decide to unload and not hold for the future, investors need to follow suit.
The actual unlock might boost the stock. The market currently expects heavy selling so anything signaling the willingness of insiders to hold the stock could be a catalyst for a short-term rally.
Conclusion
Facebook has a huge valuation issue that continues to crumble. The stock that hit $45 on the first day of trading back in May has already collapsed 50%. The current valuation of $46B remains lofty for a company losing a big chunk of business. While it continues to promise new services such as a gifting idea, the existing businesses like games are collapsing.
Facebook remains the ultimate short as a lot of investors and the media (note the two interviews last week) continue to focus on the growth of the user base. When will it hit 2B users? How about 5B users? The real question is whether it can keep the first billion users that are already abandoning the social network for other networks such as Instagram and Twitter.
Owning Instagram might be the one saving grace for the company, but it doesn't own Pinterest or Twitter that will both continue grabbing user interests and time. Whether Facebook goes the way of AOL (AOL), MySpace, and Yahoo (YHOO) remains to be seen, but it is almost unquestionable that the service has already peaked. When will investors figure that out?
Additional disclosure: Please consult your financial advisor before making any investment decisions.
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