On April 9, 2012, Facebook (FB) announced that it was set to close a $1 billion deal to acquire photograph sharing application company Instagram. At the time, Instagram generated no revenue, yet tallied roughly 30 million active users on its rolls. Facebook Founder and CEO Mark Zuckerberg then said, "We don't plan on doing many more [acquisitions], if any at all." As of September 8, 2013, Instagram still had not closed one sale, but the new Facebook wing announced that it had grown to 150 million monthly active users (MAUs). For the sake of comparison, Facebook reported totals of 1.19 billion MAUs through September 30, 2013. Facebook, like all websites, will be tasked with converting its usage rates into dollars.
On November 13, 2013, FaceBook shocked the technology commentariat with a $3 billion offer for Snapchat. Shortly thereafter, Google (GOOG) upped the ante with its very own $4 billion play for Snapchat. Perhaps even more shockingly, Snapchat and its 23-year old CEO Evan Spiegel were to reject both Facebook and Google at the negotiating table. In two years, Snapchat, as a photo sharing business has emerged to match the reach of Facebook. Still, the 30-person operation has also yet to close one sale. In any event, the recent dealings at the negotiating table serve as evidence that the nominally tiny Snapchat actually looms large as a serious threat to Facebook. Web 2.0 may destroy its own self.
The Web 2.0 Bubble
In an unprecedented move, The Federal Reserve Board targeted a federal funds rate of zero during calendar Q4 2008. From there, the Federal Reserve was to also install three separate bond-buying programs, in an attempt to further stimulate the economy through the credit crisis and housing bust. U.S. Federal Reserve Board Chairman Ben Bernanke, however, was to recently announce that the central bank would curtail its monthly bond purchases by $10 billion - to $75 billion per month, while still preserving its zero interest rate policy well into the near future. Bernanke and The Fed promised to maintain accommodative monetary policy even if unemployment rates were to fall from the current 7.0% mark towards 6.5%. Reuters, alongside Peter Schiff and a bevy of money managers, have largely credited the Federal Reserve for helping to drive the Dow Jones Industrial Average above 16,000 and into record territory.
Low interest rates, of course, encourage investors to plow money into speculative stocks. The Web 2.0 economy has been the primary beneficiary of speculative capital throughout this latest recovery. Many Web 2.0 businesses are simply websites that generate traffic through social networking. The Web 2.0 site literally functions as a broker-dealer matching advertisers, goods, and services to an established user base, or social graph. Amazon (AMZN) stock closed out the December 24, 2013 trading session at $399.20 per share, or nearly $185 billion in market capitalization. Amazon has banked a mere $34 million in net income through the first three quarters of this year. Amazon stock trades for nearly 2,000 times estimated current earnings. Web 2.0 and Internet valuations may be described as outrageous - to say the very least. Facebook itself trades for more than 100 times trailing earnings and now operates with expensive stock currency to throw around for making acquisitions.
Snapchat's aforementioned rebuff of Facebook and Google signaled that Snapchat executives were confident they could either hold out for more lucrative offers, or even emerge to challenge Facebook social media market share over the long-term. The irrational exuberance is eerily similar to that of the late 1990's dot-com era. Last July 2012, news aggregator Digg sold itself to venture capital firm Betaworks for $500,000. Digg accepted this Betaworks buyout after it rejected a $200 million offer from Google in 2008. With the exception of Apple (AAPL) and Google, the entire Web 2.0 ecosystem remains largely in serious danger of outright bust.
A Culture Clash
Snapchat's original claim to fame as a "killer" app was its pledge to automatically delete photographs, messages, and videos off company servers and the recipient's device within 10 seconds of transmission. The latest version of the Snapchat application, however, has allowed for users to replay an image one additional time by the end of the day. CEO Evan Spiegel talked up this new feature as "fun" and a "holiday present to the Snapchat community." Snapchat's popularity has largely been attributable to its built-in preservation of privacy and anonymity. The Snapchat ghost icon and disappearing images stand in stark contrast to the static online profiles created at Facebook, Instagram, Twitter (TWTR), Google+, and YouTube. Certainly, consumers are well familiar with stories of individuals who have suffered from job termination, academic suspension, and unwanted attention from law enforcement officials, due to improper Internet images and rants.
Facebook, as part of its Q4 2013 conference call, has already warned that teenagers have begun to flee its social media platform. Facebook, which began as a networking tool for college kids, is now open to all comers that would include family members, potential employers, long lost friends, romantic liaisons, and professional organizations. As such, young adults are now increasingly aware of the importance of projecting a more conservative online image. A semiannual report out of Minneapolis investment bank Piper Jaffray confirmed that teenagers have largely been abandoning Facebook, in favor of both Instagram and "Other." 17% of teenage respondents listed "Other" as their most important Fall 2013 social media website, which was significantly up from its 2% response rate in Fall 2012. Most likely, the migration over towards Snapchat was a key driver of growth within this "Other" umbrella classification.
Last November, Busness Insider estimated that Snapchat users sent 400 million snaps, or photo and video messages, per day. According to this metric, Snapchat has already doubled in size since June 2013, when the firm was transmitting 200 million snaps per day. Business Insider also alleged that its sources indicated that Facebook and Instagram users were uploading a respective 350 million and 55 million photographs daily. The case may now be made that Snapchat has literally emerged out of nowhere to form a photo sharing duopoly alongside Facebook. In time, Snapchat may actually overtake Facebook as a focal point for exchanging picture and video files. Snapchat has been recognized as the most popular lynchpin for sending risqué self-portraits, or "selfies," taken with smartphones.
The Bottom Line
Facebook stock closed out the December 24, 2013 session at $57.96 per share, which did calculate out to a market capitalization price tag of $140 billion for the social media company. Facebook has banked $971 million in net income through the first nine months of this year, after taking down $422 million in Q3 2013 net income. Facebook shareholders may expect their corporation to finish up the 2013 year with $1.5 billion in earnings. On paper, this performance would be a sharp improvement above 2012, when Facebook posted a mere $32 million in net income. Facebook stock, however, is now priced to perfection at an estimated 93.3 times current earnings.
Going forward, any legitimate challenge out of the likes of Snapchat may destroy shareholder value at Facebook. Last year, in late December 2012, Facebook launched a Poke application of its very own to compete directly against Snapchat. As fast followers, Mark Zuckerberg and his team were to literally clone Snapchat architecture within twelve days and launch Facebook Poke. Facebook Poke also features messages that automatically self-destruct within ten seconds. Still, this latest initiative out of Facebook was largely written off as a complete failure. Jemima Kiss and The Guardian gave Poke a thumbs down, before going on to rip the application as "dirty" and "smut." Kiss intimated that Poke was designed largely for sexting, where users exchange provocative pictures and messages between themselves.
In any event, conservative investors should consider selling out of Facebook stock. Facebook valuations have greatly exceeded underlying business performance. As such, Facebook share prices may collapse, if the company does not maintain hyper growth over the course of the next year. The emergence of Snapchat may signal that Facebook is having difficulty reconciling its relatively clean-cut image against a Web 2.0 underworld of trolling, fake accounts, dirty talk.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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