By
Akram's Razor
:
"Reality is what we take to be true. What we take to be true
is what we believe. What we believe is based upon our
perceptions. What we perceive depends upon what we look for. What
we look for depends upon what we think. What we think depends
upon what we perceive. What we perceive determines what we
believe. What we believe determines what we take to be true. What
we take to be true is our reality." Gary Zukav
Facebook bashing has entered the realm of the utterly absurd.
This morning I came across an
article
comparing Facebook (
FB
) to Twitter, and arguing that a future Twitter IPO would blow the
Facebook IPO away. Then in the afternoon I read an
article
from Wall Street Cheat Sheet that argued for a Facebook comparable
Apple (
AAPL
)/Google (
GOOG
) valuation of six to seven dollars; a pretty amusing argument when
you consider that Facebook is sitting on almost five dollars a
share in cash on hand. And let's not forget the ridiculous
Reuters survey
which seemed to be almost commissioned to have something negative
to report. Yep, tearing something down is a lot more fun than
building it up.
That is no surprise, but you'd think with something this big
that at least some people would have a nice grasp of what is going
on and get the message out. Sadly, that has not happened yet, so I
have taken it upon myself to weigh in with an article or two that
offers what I think is a more accurate assessment of the "Facebook
Fiasco."
For this note I will focus on the misconception that Facebook's
IPO was somehow a failure, and more specifically on a TheStreet.com
article which compared how Facebook has been managed to Twitter. An
article which, by the way, I was surprised to discover was written
by SA regular contributor and fellow Netflix (
NFLX
) bear Rocco Pendola.
In his article, Rocco, who admittedly is bullish on Facebook,
makes an argument that somehow implies Twitter has executed better
than Facebook. To be specific, Rocco writes, "
everything
Mark Zuckerberg and Facebook have done well, Dick Costolo and
Twitter have done better." Really? With all due respect to Rocco,
that is a ridiculous statement and very typical of the type of
stuff Facebook is getting hammered with on a daily basis. And let's
be clear I am saying this despite the fact that there is no web
property that has caught my eye more than Twitter over the past
couple of years. It is in fact the only stock I have ever
personally purchased on a secondary market, and also one that I
professionally lobbied for acquiring a position in at a valuation
closer to $2.5 billion. Suffice to say, I know a thing or two about
the company.
I can also tell you that my interest in Twitter carried over
into other microblogging sites like Sina's (
SINA
) Weibo (a much better bargain valuation wise) before they became
mainstream market stories. So why was Twitter so interesting to me?
Simple: It was and still is a web property acquisition candidate
the likes of which you rarely come across in markets. To me a
Twitter Google marriage was a no-brainer from day one. (The same
argument goes for Baidu (BIDU) and Weibo.) The problem with this
view is that Twitter knows this and so do Facebook, Microsoft
(MSFT), Yahoo (YHOO), and Apple. That is what has always appealed
to me about this stock, the near certainty of a nice fat premium
from an acquirer was always too tempting to pass up.
But let's be clear, knowing you are an attractive piece of web
real estate isn't a measure of execution. Twitter is by no means
executing better than Facebook. In fact, odds are Costolo and co.
will never come close to accomplishing 10% of what Zuckerberg has
accomplished. This is because Twitter's path to comparable
monetization is 1000x harder than Facebook's. Twitter for me is
like having Bloomberg Anywhere except I don't pay $3000+ a month
for it and the array of information is much more diversified.
It is an incredible feed of data, but completely lacking in
valuable display real estate or a clear subscription revenue model
capable of justifying the current valuation. This is why Twitter
recorded revenue of less than $150 million last year versus $3.8
billion for Facebook. So, for all the criticism about mobile, at
least Facebook actually has valuable display real estate to fall
back on.
See, I am of the belief that mobile is not going to be an
advertising rainmaker for anyone of the big internet companies. I
think the real money in mobile will go to the network operators,
the transaction/payment processors, and the premium branded
hardware sellers. Mobile from an ad standpoint is just not valuable
display real estate, and odds are it may never be. It is similar to
what has transpired in television with sporting events as on demand
killed the captive live TV audience. If you control the valuable
piece of a shrinking pie, you will retain pricing power. The NFL,
NBA, and the likes have figured that out. The same philosophy will
apply to online advertising. Basically, if Facebook owns the most
valuable real estate you are checking into via a non-mobile device,
they will continue to prosper even as mobile web usage rates
continue to rise.
Yep, mobile monetization is a challenge for all the major
content players on the web, so I am not going to lose a lot of
sleep over it right now. This is also why when I hear Twitter's
Costolo touting how well they are doing on mobile now that this has
become a hot topic, I can do nothing but smirk. Twitter doesn't
have a real display business, and thus no cash cow to milk while
they experiment with ways to milk the mobile web. Their strength is
also on the go news which makes them more suited for mobile as far
as engagement, but that doesn't mean mobile monetization will be
any easier for them than it is for Google or Facebook. Honestly, if
you cornered Dick Costolo I am sure you could get him to admit that
he wished he had Facebook's 'mobile problem' because as things
stand he still hasn't figured out how to generate significant
revenue, let alone profits, out of the entire Twitter platform.
This monetization problem has been what has held back the
Twitter and Weibo IPOs, not some sort of management steady as she
goes philosophy. That was the case before Facebook, which contrary
to popular belief, timed its IPO to perfection. Yes, in the land of
going public, raising a $7 billion war chest and providing insiders
a fat $10 billion single day cash out at a $100 billion valuation
is the definition of perfection.
Understand that Facebook not only raised enough cash to do as
they see fit for the next decade, but they also guaranteed
themselves that they hit the top of a cycle. This is pretty good
news if your future business model is hiring talent and acquiring
smaller start- ups. When the perception in the capital markets is
that there is no more easy money in your sector, valuations start
to fall and jobs disappear. If you are Facebook, you couldn't ask
for a better environment to execute your strategy.
This is why I have a hard time understanding how anyone could
argue that Costolo has done a better job of positioning Twitter for
its seminal market moment. Twitter didn't have what it took to IPO
before Facebook rang the bell, and after Facebook they have almost
no chance of coming to market without disappointing a bunch of
their current investors. Their last major round was north of $8
billion. Run the numbers and you will realize that this is over 50x
trailing revenue or 3x where Facebook is at today. Oh, and at this
valuation the last VC guys who put in the capital Twitter is
burning through while it tries to figure out its model get to break
even. So explain to me how such an IPO will blow the Facebook IPO
away when the last major round Facebook raised was at $50 billion,
and those investors got a partial exit at $100 billion in under two
years?
As things stand, the Twitter story is all about having a good
poker face as a private sale is the only realistic exit that will
satisfy all Twitter investors at this point in time. If they try to
go the IPO route (which I still think is not an option because of
de minimus relative revenue), they will have to do a managed IPO in
which they float a tiny slice and play the artificial demand game
and try to facilitate their exit.
This is also assuming Twitter's revenue growth - which has been
a major challenge - really comes through and hits this $1 billion
by 2014 mark that has been loosely tossed around. And let's not
even bother with a profitability conversation right now let alone
make comparisons to Facebook's pre-IPO EBITDA margins.
See, if you consider how intricately Twitter has woven itself
into our daily lives, its revenue at this point in time is very
disappointing. You can't say the same thing for Facebook, and that
my friends, is what you call execution.
Disclosure:
I am long [[FB]] via call options.
See also
Jim Cramer Pumps Alkermes - Is He Right?
on seekingalpha.com