Andrew Left of Citron Research has announced that he is short Facebook Inc (FB) stock. Left’s specifically said, “I see Facebook losing share to Snapchat and overstaying its welcome in other niches,” Left told CNBC. “I am not saying Facebook is a bad company; it just will not be a $330 billion company in a year,” he said, referring to the company’s market capitalization, which is near $328 billion.
What do we make of Left’s comments, of Facebook stock going forward?
To understand Left’s comments, you first have to understand Left. I had lunch with him a couple of years ago, and we talked extensively about shorting stocks. What I gleaned is that there is no question that Left (or Citron) knows what he’s doing. He has very specific comments about which stocks to short, and when to short them.
My guess — and it’s just a guess — is that Citron Research established its short position and then made his public announcement because he knows he can move markets. My guess is that he is being truthful about his thoughts on Facebook stock, as well. We have no idea when he will cover, of course, but it’s a reasonable argument and consistent with what I know of him.
I will say that I wouldn’t expect a huge decline in FB stock simply based on this announcement. Left’s biggest successes come from uncovering fraud or other questionable practices at various companies.
My issues with Facebook stock initially were that I didn’t see a viable method to monetize users. I got that wrong. Facebook’s advertising model is working very well, and it’s working because it has a solid user base that also appears to be growing.
According to Statista.com, the number of monthly active users is 1.65 billion. I imagine that number is not accurate, considering there are tons of temporary pages, and pages that are for local businesses or political campaigns that never gather “friends” or “followers”.
The number of mobile monthly active users is also increasing fairly steadily at about 7% each quarter.
Now, there are some issues with Facebook beyond users. The amount of advertising dollars spent each year tends to be relatively constant. It will ebb and flow, but right now it is growing at around 5% annually. The pie is worth over $2 trillion, and FB gobbled up about $15 billion of it last year. So one argument is that it can keep on taking market share, and it may very well do so. Facebook is hot right now, as far as its position in social media, and advertisers go where the heat is.
However, the vast majority of FB revenue is advertising. It is really nothing more than a digital billboard as far as revenue is concerned. Global economic cycles will hurt it at some point as consumer and ad spending decline.
In essence, if you own FB stock, you are buying a $326 billion advertising company, trading at 18 times revenue. One of the biggest names in advertising, WPP plc (WPPGY), was valued around $20 billion on sales of $15.6 billion — or 1.3 times sales — when it was acquired.
As a growth stock, one can certainly assign a premium to FB, as well as additional premium for its world class brand name, cash position and free cash flow. Should net income increase 25% this year to, say, $4.5 billion, you are paying 72 times earnings.
So in that case, I agree with Citron.
Is Facebook stock worth $325 billion? Not right now, it isn’t. I would not buy the stock here.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned.
