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Facebook Hits 1 Billion Users Mark. So Is That a Good Thing or a Bad Thing?

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Facebook announced a major milestone, and it's time to examine its meaning for investors.

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Here's a screenshot from the Facebook app running on my Apple (NASDAQ:AAPL) iPhone 4S:



See "Sponsored" next to my big red arrow? That means you're looking at an ad. These are actually pretty well-designed because unless you're looking for the "Sponsored" mark, it's very easy to miss on a smartphone screen. Ads on a Google (NASDAQ:GOOG) search page, for example, are much more obviously ads, in my opinion.

Now let's look at what's happened with Facebook's stock price.

Facebook hit an all-time low of $17.55 on September 4, before bouncing about 25% to the $22 handle at which it's trading now.

Why?

Well, the main factor seems to be Mark Zuckerberg's crowd-pleasing turn at the TechCrunch Disrupt Conference on September 11. (See: Wait a Minute! Did Facebook's Mark Zuckerberg Really Say Anything New?)

To make a long story short, after months in hiding, Zuckerberg came out swinging on mobile, making the following point:

So mobile is, there are going to be more users, each user's going to use spend more time, and per amount of time that they spend, we're going to make more money than we make on desktop.

As Vincent Vega might say, that's a bold statement.

The problem is, Zuckerberg is notoriously long-term-minded. In fact, during that interview, he specifically mentioned measuring the company's success over a three- to five-year period. He wasn't necessarily talking about this quarter!

Nevertheless, investors got pumped big-time, sending the stock up 8% the next day alone.

But here's the problem: He wasn't offering anything new.

Back on July 26, on the Q2 earnings call, Facebook was already bragging about its success in mobile. Here's an excerpt:

By the end of June, Sponsored Stories in News Feed was at a run rate of over $1 million per day in revenue and about half of that is coming from mobile. This is an encouraging start in our effort to generate revenue from the mobile use of Facebook.

Furthermore, let's do a rewind to Monday, when COO Sheryl Sandberg was interviewed by CNBC anchor Julia Boorstin, who asked a great question: "Has the new mobile app you launched in August boosted revenue?"

Sandberg's answer? "The new mobile app is boosting engagement, and engagement always leads to revenue."

In no way can that be construed as a yes.

Yes, Sandberg may be sandbagging like a vintage Bill Gates, but there's no real evidence that Facebook's mobile business is taking off in a way that justifies the stock's valuation.

And essentially, that's why I'm short.

Note, I am using options to define my downside risk with this trade. I am using a combination of short call spreads and long out-of-the-money puts to bet on total destruction. This strategy is a modified risk reversal. (See: 9 Weeks to Better Options Trading: Risk Reversals.) I am not shorting the stock outright because if Facebook beats, it could easily go to $30 or higher in the blink of an eye. I'd much rather know where I stand in the event I'm wrong, which I've been more than once.

I don't know that Facebook is going to miss. I just think expectations have rebounded enough to give a strong probability of a downward spiral in the share price if it does.

Have you checked out Wall Street's revenue estimates going forward? Analysts are actually expecting an acceleration in revenue growth for 2013. According to Bloomberg data, consensus forecasts call for a 29% revenue gain next year. That's actually an acceleration from the 27% they're expecting in Q4.

If Facebook misses, the Q4 revenue growth forecast will come down, and the 2013 numbers will go below that!

Right here, right now, the stock's trading at 35 times expected 2013 earnings.

Rich valuations are not a problem for a company that consistently puts up big numbers, as you can see with stocks like Salesforce.com (NYSE:CRM), which is expensive as all get-out on any metric you can find. (See: Salesforce.com Provides Lesson on Dangers of Shorting High-Octane Momentum Stocks.)

But they're a huge problem for companies that don't. Like Netflix (NASDAQ:NFLX) back in 2011. (See: Netflix: Double-Costanza Time After the Most Predictable Collapse of 2011.)

So will I be going to Sizzler in celebration of a big drop in Facebook shares?

We'll know on October 23 when earnings hit.

Position in FB, AAPL.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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