Published On: Fri, Feb 6th, 2015

Bursting of Tech Bubble Would Pull Down Facebook Stock, Report Says

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Facebook is excessively reliant on app-based startups, so if those companies run into problems Facebook’s mobile advertising revenue could collapse and its stock price may plummet.

The Motley Fool said the worst-case scenario for Facebook shareholders was described by Snapchat CEO Even Spiegel in an e-mail to Michael Lynton, a member of Snapchat’s board, in November 2013.

In the email, Spiegel wrote that Facebook “has continued to perform in the market…largely due to mobile advertising performance, ” saying “This is a huge red flag because it indicates that sustainable brand dollars have not yet moved to Facebook mobile platform and mobile revenue growth has been driven by technology companies (many of which are [venture] funded).”

He also said that “[venture capital] dollars are being spent on user acquisition … This props up Facebook share price and continues to justify [further venture] investment in technology”, adding that “When the market for tech stocks cools, [Facebook’s] market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease-compounding problems for Facebook and driving [its] stock even lower.”

This is not an unfounded argument as almost all of Facebook’s 300% gains have come on the back of its strong performance in mobile. Shortly after its IPO, Facebook shares plunged as investors wondered if it would be able to successfully adopt its business model — which had, until that point, depended on desktop ads — to increasingly popular mobile devices, The Motley Fool said.

Today, mobile advertisements make up the overwhelming majority of the business. Last quarter, 69% of advertising revenue came from mobile, up from 53% in the prior year. In October, COO Sheryl Sandberg said that the growth in mobile ads was “very broad based.” She specifically cited Burger King as an example of a company that was using its app install ads to great success.

The crux of Spiegel’s argument rests on the notion that we are currently enjoying a tech bubble — or at least some sort of speculative mania in the sector. Hedge fund manager David Einhorn made a similar argument last year.

The social network could dispel some of these concerns if it offered a better breakdown of where its mobile ad revenues are coming from. Of course, if it is a significant percentage, it would only make matters worse.

Few large cap tech stocks have performed as well as Facebook in recent years, with shares tripling since Aug. 2012.

In another development, Credit Suisse analysts named Goldman Sachs, Micron Technology, Tesla Motors, MGM Resorts, life sciences company OvaScience, Southwest Airlines and solar technology firm SunEdison as their top picks for a huge upside in 2015.

 

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