Social networker Facebook kicked off the new year with a lot more vibrancy than the year before. The company's stock has soared from its lows, a complete reversal from the botched IPO midyear. And early in January, the company promised a big game-changing announcement.
So I went back to the man who predicted Facebook's fall in this column, money manager Dan Niles from AlphaOne, who shorted the stock at its high of $42 a share. But this time, Niles had a change of heart. He now has Facebook as his No. 1 technology pick of the year. I asked him why the reversal and what's changed at Facebook, and about the evolving trends within technology. Our interview follows, edited for clarity and space.
Q: In 2012, you told us to sell Facebook, and you were right. But you have changed your opinion. And sure enough, the stock is doing well again. What changed?
A: When the company went public, they had no mobile strategy and it was a big negative. More people access their Facebook through their smartphones or their tablets, and Facebook wasn't getting paid. And those are two of the fastest-growing categories of electronics products out there.
And then, in June, they started something called mobile-sponsored News Feeds, and this got them into that category. That was the big change in the company from a micro basis. But when you step back and look at the big picture, it comes down to a change in attitude, since they went public.
CEO Mark Zuckerberg has said Facebook was not originally created to be a company. It was built to accomplish a social mission, to make the world more open and connected. They weren't looking to make money. And in fact, later on in that letter, he says, simply put, we don't build services to make money, we make money to build better services. Since that period of time, the stock got cut by more than half. A lot of employees were unhappy; Wall Street was unhappy. And there was a mind-set change in the company in terms of thinking about how to monetize these billion users.
Q: How would you characterize consumer spending and demand for PCs?
A: PC demand has faced many challenges recently due to cannibalization from tablets and smartphones and limitations in hard disk drive (HDD) capacity. Although the October 2012 introduction of Windows 8 with a touch interface may be the most important release for the computing industry in over 15 years, demand stalled in front of the launch in Q3 and demand so far in Q4 seems lackluster.
Recently, poor consumer reception of Windows 8, which has not seen the greatest reviews so far, may be disastrous for PC demand. Investors who had been hoping for a pickup in PC demand in Q4 with the launch of Windows 8 may be in for a rude surprise.
We note that PC units in 2012 are expected to decline for the first time since 2001 despite this launch of a new PC operating system and the introduction of touch functionality. Even in 2008, PC units did not decline. We expect the PC industry to remain in secular decline for the next several years as tablets, smartphones and phablets (hybrid smartphones and tablets such as the Samsung Galaxy Note II with a 5.5-inch screen, which sold 5 million units in two months) continue to take share.
Q: So with Facebook, then, you believe in the mobile strategy? What would be the wrench in the ointment?
A: Well, it's not just the mobile strategy. With the mobile strategy and advertising in general, what you really worry about is lack of engagement. So if you're logging onto Facebook and you're just bombarded with advertising every second, you may go, "Boy, for the amount of aggravation this is, I really don't want to use it." And that's what Facebook doesn't want.
