The bad news for Facebook (NASDAQ:FB) mounts on the earnings front with events at both Zynga (NASDAQ:ZNGA) and at LinkedIn (NYSE:LNKD) contributing to its woes. Gradually even the most diehard bull must be starting to recognise that there is no earnings visibility at all for Mark Zuckerburg’s company. It is on that basis that I continue to value it on the basis purely of historic earnings at $5 a share. The stock remains a conviction sell.
Firstly Zynga issued a shock profits warning last night. Zynga offers its games on Facebook. On the back of that JP Morgan this morning slashed its calendar 2013 revenue target for Facebook’s Payments unit from $797 million to $582 million. And of course, since this is very high margin business for Facebook – the implication for earnings visibility are pretty clear.
I am as interested by what is happening at LinkedIn. It has recently rolled out a redesigned company page to all advertisers after a period beta testing and has announced a “free featured update” function on top of the company news section for 48 hours. Facebook offers companies the same function but makes company’s pay for it and recently changed its algorithms so that unpaid company posts are seen by fewer visitors.
According to Business Insider this has not gone down well with advertising agencies. Of course the two products target different markets but it reinforces my point made frequently here that with its desperately poor returns per click metrics, Facebook will struggle in a big way to grow its revenues and earnings in the way that some of the more bullish analysts believe it will, and which it has to do in order to justify anything like the current valuation.
At $21.45 Facebook still trades on a 2012 earnings multiple of 43, falling to 34. But surely there can be less and less belief that analyst’s forecasts can be met. Ahead of the mammoth expiry of lock-ins over the next few months Facebook remains a compelling sell and my fundamental long term target of $5 is unchanged.
Incidentally this should not be seen as a cue to switch into LinkedIn. Giving away free services is not going to drive its earnings ahead by enough to justify its current share price of $121.98. I shall cover LinkedIn in more detail shortly but a calendar 2012 price earnings ratio of 200 (based on consensus forecasts) really is very hard to justify indeed.