Jim Harrer


Facebook Q2 2012 Results Analysis From The Cigar Club

facebook buy sell holdSo last night the peanut gallery, uh sorry, my cigar club, wanted to talk about Facebook's Q2 2012 results.  Here is a recap for those who don't know:

Facebook, Inc ($FB) reported pretty flat year-over-year earnings growth. They earned 12 cents per share in the quarter that exceeded the consensus estimate by three cents. However, including stock-based compensation, payroll taxes and income tax adjustment, Facebook lost $.08 cents per share compared with earnings of $.011 cents per share in the year-ago quarter.

Revenue jumped 32.3% year over year to $1.18 billion, slightly better than Wall Street's estimate of $1.15 billion. The year-over-year growth was driven by strong advertising revenue (84% of the total revenue) that climbed 28% year over year to $992.0 million. The rest of the revenue from payments & other fees in the quarter. The strong upside in advertising revenues was primarily driven by an 18% increase in the number of ads delivered based on growth in the user base and an increase in average number of ads per page from the prior-year period.  Cash flow from operations increased by $242 million.

How are investors taking the news this morning?  Facebook is down 14.14% to $23.05 (7/27/2012 @ 11:32 EST) check it now

My weekly cigar group went into last night's smoke pretty depressed.  A couple of them got in on the IPO of $38.00 and thought they had purchased extra special rare gold on May 18, 2012 when it appeared on NASDAQ's wall.  Half of the group of six passed on buying Facebook after hoodie-gate, they're words not mine.  I was on the other side of the fence, I purchased a small block, in the after market when it first dipped.  So the group is pretty equally divided three and three, stockholders of Facebook vs really old money who love Wells Fargo and AT&T.  Yes, that is a dig and I will pay for it next week.

The only one who won last night's argument was Maker's Mark.

The guys in the Facebook bleachers came ready to rumble.  Here are some of their comments from last night debate, that I remember (smile):

  • Mark Zuckerberg should not have skipped this business classes at Harvard.
  • Zuck is a technologist, not a businessman.  
  • Zuck made his billions, he's disconnected from his investors and Wall Street. 
  • How do you lose money on $1.18 billion in sales as a Software as a Service?
  • Facebook's management is demonstrating a lot of immaturity.

I'm sure there were more comments, but I think you get the gist of the tone.  Most of the negative comments were focused on Mark Zuckerberg and less on David Ebersman 43, CFO) and Sheryl Sanberg (43, COO). It was as if these members of the management team have no say in how the business is operated, which I found, well, flawed.

Facebook - Buy, Sell or Hold?

This was the question directed at me last night.  It wasn't fair, I was on my 3rd Maker's and had almost lost my voice during the heated debate.  I know how difficult it is to transition from a private company to a public company. I did it with Mustang Software that I founded in 1986 and took public on Nasdaq in 1995. It takes time to get comfortable swimming around in the fish bowl.  The problem is, I'm not an insider, I don't know what Facebook really thinks about their investors. Still, I would say if you own Facebook, it's a hold.  I would not (and don't plan on) selling at this point. If I was out of the position, the safe bet would be to wait another quarter before jumping in.

More shares to be unlocked soon.

Another concern many investors have is the number of shares being unlocked for trading. About 268 million shares will be released in mid-August, an additional 192 million shares in mid-October and the largest slug — more than 1.2 billion shares — in mid-November. Though some of those shares will not be sold, the new supply still will dwarf the 421.2 million the company sold in the IPO. If we see the stock under pressure next month and again in October, all of us who own Facebook should consider selling before the release and repurchasing after Thanksgiving.

Why I'm not selling Facebook today.

  • I don't believe Facebook has 900 million unique active users, but I do believe they have 500 million.  I don't think they're in immediate danger of being disrupted by Google, Microsoft or Yahoo!  Therefore, give management a couple quarters to figure out how to improve their ad delivery system and other ways to monetise the platform without killing traffic.  Facebook will become a huge cash machine, because it remains a viable destination for millions of users, every-single-day.
  • The company has $10 billion in cash and generated $242 million as cash flow from operations in the quarter.  This isn't a Zynga.  Speaking of Zynga, advice to Facebook's leadership, you might want to start reporting before Zynga or figure out a way to stop Wall Street from treating Zynga like one of your subsidiaries.
  • We don't know what the upside potential will be for the Instagram acquisition when it starts to figure out it's ad program.  It could, could, double their revenue.
  • I think Zuck will start to get bothered that most of his employees stock options are under water and internal pressure to figure out the "business" of Facebook will motivate him to be more open to ideas on how to build a highly profitable business.
  • Facebook is surrounded by really smart people, smart board of directors and smart institutional investors.  They will all help mentor the company through these waters.  Facebook isn't just one guy. I believe Facebook's  management team will continue to learn, grow and improve the business model over time.  It's not a sprint and yes it sucks owning a declining stock, but I'm not giving up on Zuckerberg, Sandberg or Ebersman.

So, there you have it.  I'm holding on.  I would love to hear your thoughts.


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