Is Facebook The Next Netflix?

We are only a few hours away from Facebook’s public IPO and the entire World seems to be talking about the biggest IPO in history.

The last I saw, the stock is expected to open at $38, which will value Facebook at $104 Billion!

So, what is going to happen to Facebook’s stock price in the future? Where is it headed?

I’m suggesting in this blog post that Facebook could easily become the next Netflix (NFLX).  Remember Netflix?  I’ve written about NFLX several times on this blog.  Netflix is a wonderfully innovative company which has disrupted the movie watching and movie distribution industries.  It has evolved beyond shipping DVDs in the mail to become one of the largest online movie streaming companies in the World.

Rocco Pendola wrote a fascinating opinion piece on The Street back in April entitled, Why Netflix Crashed which got me thinking about whether Facebook is the next Netflix. In the article, he eloquently summarizes his thesis:

It’s really quite simple. You can break down the numbers all you want. You can try to pinpoint particulars that shed light on what happened here. There’s little need for that, though. Netflix tanked because it is no longer a growth company in the spirit of today’s “overvalued” growth companies like Pandora (P_) and Lululemon (LULU_).

As I have explained in several recent articles , Wall Street will always “overvalue” companies in perpetual start-up mode. Profitability, for all intents and purposes, does not enter the equation. Investors in high-flying growth stocks look for three things: (1) logical and realistic long-term opportunity, (2) enough reinvestment into the business to seize those opportunities (spending) and (3) rapidly growing revenue.

Would you describe Facebook as a company in perpetual start-up mode?  It’s “Hacker Way” culture would suggest that it has been that for the past 5 years.

In order to sustain and multiply it’s $100 Billion valuation, Facebook is going to need to grow it’s user base significantly and find ways to “monetize” the time, data and value that those users bring to it’s network.  Let’s look at each of these in turn.

Social And Advertising Do Not Mix

One of the largest advertisers in the US, General Motors, announced on Tuesday that is stopping all paid advertising on Facebook.  They effectively pulled $10 million of Facebook ad spend. Now, $10 million may sound small when compared with Facebook’s total revenue numbers, but add a few dozen more Fortune 500 companies to the list and we could see a major hit to Facebook’s revenue numbers.

Social media and advertising do not mix.

Social engagement ≠ advertising success.

Massive usage and time spent on Facebook does not guarantee that users will respond to advertising, especially display advertising that we see on Facebook today.  Look at other growth companies like Twitter and others. None of them have cracked the advertising conundrum and neither has Facebook.  People spend time on Facebook to connect with friends, share photos and news and waste time.  How many actually click on ads?  Look at the major Facebook players like Coke and Starbucks.  They are not buying significant advertising on Facebook.  They have millions of “fans” that have liked their respective Facebook pages, but we’re not seeing advertising work in this space.

Growth Potential And Valuation

Facebook is a behemoth. There can be no doubt about that.  Facebook’s official IPO data states:

• 80 percent of all Internet users in Chile, Turkey, and Venezuela are on Facebook
• 60 percent of all Internet users in the U.S. and U.K. are on Facebook
• 20-30 percent of all Internet users in Brazil, Germany, and India are on Facebook.
• 15 percent of all Internet users in Japan, Russia, and South Korea are on Facebook.

However, Facebook is a maturing company, not a small startup with massive growth potential.  It grew exponentially over the past 3 – 5 years and those aggressive growth numbers drove it’s valuation to the $104 billion we see today.  It’s revenue is slowing, and it’s earnings were actually DOWN in the past 12 months! (Down 12 percent from Q1 2011 – Q1 2012).  Facebook itself has stated that it’s previous growth rates are “not sustainable”.

The stock at $38 represents a P/E of 104 x 2011 earnings.

The Future?

I wrote over a year ago about why brands’ future should not on Facebook. What about “consumers”?

Facebook already has almost 1 billion users.  How much further can Facebook grow? The estimate of global Internet users is anywhere from 1.5 billion to 2 billion.  Not everyone in the World is going to sign up on Facebook and in the major economies, Facebook penetration is already running red hot.

Ad revenue growth is not a guarantee.

The smart money like DST’s Milner and Microsoft have already made huge returns from their Facebook investments.  Major insiders like Accel Partners, DST, Goldman Sachs, Tiger Global and Peter Thiel are selling $10+ billion worth of stock on Friday.

Facebook has already had it’s “IPO ride” that started with Peter Thiel, Facebook and DST.

Facebook is being forced to go public because of the SEC “500″ rule and once it’s public, it will be subject to the whims of Wall St.  Wall St looks at revenue growth, earnings growth and profit potential.  Wall St doesn’t give a shit about anything else.

I believe that $FB will mirror the stock performance of $NFLX – it has already had it’s huge run up to $104 Billion in market cap and $38 per share.

Forgetting the “IPO pop” effect that will no doubt occur on Friday, where will the stock trade in 3 months from now? 6 months from now? 12 months from now?

I’m an eternal optimist and risk-taker but I’m not bullish on Facebook’s long-term stock price.

Time will tell.

Apple Stock Going to $1,000?

Yesterday AAPL’s market cap closed above $500 Billion. It is one of only six companies that have ever flirted with this market capitalization and none have ever maintained this valuation for an extended period. Is Apple going to be the exception?

On August 24, 2011, I tweeted the following:

What’s going to happen to $AAPL stock? I say it’s going to trade north of $600 per share sometime within the next 24 months.

— David Feldt (@davidfeldt) August 25, 2011

Apple stock closed at $373.72 that day.

Here’s where it’s traded since then.

Taking a five year view of the stock:

That $600 number is clearly in sight.

How much higher can it go?

Steve Wozniak sees it hitting $1,000.

Does it have that much upside after the incredible run it’s had over the past five years?

In a word: Yes.

Why?

• China
• Corporate / enterprise market for iPhone, iPad and Mac products
• Apple TV
• P/E of only 15
• …

Rethinking (Online) Payments In A Post-Credit Card World

In a sea of startups with non-existent or ill-defined business models and me-too ideas, here’s a wonderfully simple idea that has huge revenue and profit potential.

Dwolla was founded by 28-year old Ben Milne in Des Moines, Iowa.

After paying an exhorbitant amount of fees to credit card companies, he and his team decided to rethink (online) payments and build something to bypass the credit cards companies.

He has created a disruptive payment platform linked to the existing ACH payment network that all banks use.  Dwolla has the potential to dominate e-commerce, m-commerce and s-commerce in the years to come.  Unlike Paypal and Square, which sit on top of existing credit card platforms, he enables payments between consumers and merchants without the oppressive credit card fees.

Dwolla charges 25c – yes, a quarter – on every transaction regardless of the amount of the transaction. Not your typical 2.9% of total amount sent plus $0.30 per transaction that others charge.

Ben’s focus is clear: “To maximize the value of every electronic financial transaction.”

Why do I like Dwolla so much? Here are 7 reasons:

1. Rethinking an industry – there have been many mobile payments solutions since PayPal but they all utilize the same credit card network, including Square. Here’s a small team in Iowa who have rethought global payments and created something unique and smart.
2. It’s about revenue, transactions and money – this startup is focused on making money from the get-go. It’s not just another trendy social media photo sharing app with no business model. Its focus is to maximize the value of each financial transaction that’s made online. It takes a tiny transaction fee and allows its customers (merchants and consumers) to keep more of their money. Simple. Powerful.
3. Serial entrepreneur who has had financial success – Mr Milne is only 28 and has had proven success before.
4. Multi-sided platform with API and tools to allow explosive network growth – Dwolla is a multi-sided platform and it provides a seamless API which allows developers and third-party companies to build an extensive ecosystem with great ease.
5. Smart investor choice – Dwolla chose a major financial services company as its investor and has leveraged the connections, knowledge and footprint of this investor to test and grow its platform.
6. Smart distribution strategy – Dwolla doesn’t just rely on the typical social network effect to sell itself.  It is selling itself as a financial product via its financial services investor network
7. Exceptional user experience – Easy, well-designed user experience ensures adoption.

Scary Apple Chart?

Business Insider just posted the chart below and labeled it:

“Here’s The Chart That Should Scare The Heck Out Of Apple Investors…”

Well, “market share” and “units shipped” aren’t the metrics that has driven Apple’s stock price to North of $400.

Innovation, or more importantly,  Apple’s ability to monetize innovation has. Simply put, Apple generates vast PROFITS.

How does its profitability compare to the other players in the mobile phone space?

Here’s a more instructive chart (courtesy of Asymco.com) that continues to make Apple investors very happy: