Update on $4 Facebook Short Thesis

This is an update to an article originally published on 7/31/12. You can read the original article here: http://sumzero.com/news/97.

Update:
Facebook shares sank after BMO Capital analyst Daniel Salmon wrote that many advertisers appear to be reducing the amount of money they're spending on the website. Two out of every three advertisers contacted by Salmon divulged information that was negative for the stock, the analyst wrote.

Can Facebook still be considered a growth company? Facebook might still be growing. And might be growing (FB) is worth a lot less than highly-probable growth. Facebook does not deserve Google's valuation (http://goo.gl/qu6Ow)

Other News:
*Facebook core business is in decline
*Ad Agency Interest In Facebook Declining
*FTC Accuses Facebook of "Deceptive" Apps Program
*Facebook having trouble in Australia
*Apple getting into the social media space
*Increasing regulatory risk

Facebook’s core business (U.S. desktop) is now declining:

From Business Insider - http://www.businessinsider.com/facebook-users-decline-2012-8

Most alarmingly, the number of ad units that the company served in its most important market, the U.S., declined 2% year over year--an unheard-of event for a company that most investors viewed as a "hyper-growth" company

Facebook's web-based users in the U.S. declined year over year, and the company's core U.S. business may be shrinking.

By combining the information above with some more information from David Ebersman's remarks:

The 9% increase in price per ad [global] was driven primarily by the United States, where CPMs [price per thousand ads] increased by over 20% due in large part to the ramp-up of Sponsored Stories in News Feed on both PCs and mobile devices.

So, the vast majority of the impressive 20% per-ad price increase in the U.S. was driven by the rollout of a new product, "Sponsored Stories," which commands much higher prices and is delivered to all users, not just web users. Facebook's North American ad revenue grew only 22% in the quarter. So that suggests that, excluding the impact of the new product, the core U.S. business is flat or shrinking (we don't know how much of growth came from Canada).

Unless or until Facebook rolls out entirely new products, therefore, the key driver of the company's growth will be the ongoing rollout of "Sponsored Stories." Right now, at least in the developed markets, that seems to be the only Facebook revenue component that is growing.

See prior comment on problem with "sponsored stories" (they confuse / frustrate users and the stories dillute existing ad business by inflating # of "likes").

Ad Agency Interest In Facebook Declining

http://www.forbes.com/sites/roberthof/2012/07/03/reports-facebook-ad-spending-growth-fades-could-drop-even-more/

Social marketing analytics firm 33Across says client advertising agencies and brands are focusing less of their attention on Facebook compared with the rest of the Web. That doesn’t speak directly to their budgets, but sentiment is important too.

Of the 2,200 agencies and brands surveyed in June, 80% said the “rest of Web” gets more of their team’s attention now than Facebook, up 11% from March, well before Facebook’s May IPO. Some 71% of respondents said they’re now spending 80% of their attention on the rest of the Web vs. Facebook, up 23% from March.

Finally, when asked the money question, “Do you see your Facebook spend changing vis-a-vis the rest of the Web?” more than five times as many in June compared with March said they’re planning on reducing their Facebook budget. That’s vs. the rest of the Web, not on an absolute basis.

More FB problems:

FTC Accuses Facebook of "Deceptive" Apps Program
http://www.forbes.com/sites/davidthier/2012/08/14/ftc-accuses-facebook-of-deceptive-apps-program/?partner=yahootix

Anyone looking at the green “verified by Facebook” tick next to some applications probably imagined that an app would have to go through a certain approval process. That’s what the program was supposed to do, and that’s what Facebook accepted money from developers to do. But the report alleges that Facebook was taking money without doing anything of the kind.

“Facebook took no steps to verify either the security of a Verified Application’s website or the security the Application provided for the user information it collected, beyond such steps as it may have taken regarding any other Platform Application.”

It’s all part of a broader problem with the social networking site – every time a report comes out alleging that something on the website isn’t what it seems, user’s trust in the platform erodes a little bit more. That’s a big problem for advertisers hoping for deeper engagement with the site, and it doesn’t bode well for the sorts of monetization schemes that will require a lot more user trust – things like retail or premium content.

Facebook having trouble in Australia

http://m.theaustralian.com.au/media/digital/facebook-advertising-sales-are-under-pressure/story-fna03wxu-1226448727526

Apple getting into the social media space (http://goo.gl/5UNL4)

Yet FB is still 2x the valuation of other high flying tech companies (none of those high fliers have a declining core business that is relying on tricking users to keep the growth going and/or facing declining users / advertiser interest) (http://goo.gl/5psXK)

More regulatory risk:
http://www.ft.com/intl/cms/s/0/f4c6b208-e2cd-11e1-a463-00144feab49a.html#axzz23Qj0XUcV

To read the original article, follow this link: http://sumzero.com/news/97.

Want the Full Report???
John Pulliam's full short thesis on Facebook is 13-pages long and includes an in-depth valuation and strategic analysis. If you're interested in taking at look at the real thing, email elite@sumzero.com for more information.

Click here to get more research from SumZero.