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.
The flipside of it is, if you're getting no advertising on mobile, Facebook isn't making any money, at which point, the business model is suffering. So there's sort of a happy medium in between.
Right now it doesn't seem as though the amount of advertising on mobile is a real problem for the company in terms of turning off users from the service itself. But there are other things that they've introduced recently which are very powerful if you look at the next six months to a year.
Also, in the month of December they actually launched in the U.S. their gift program, which is another revenue stream that could be huge over a period of time. This gets them into the e-commerce business, because Facebook already reminds you about anniversaries and birthdays and all this.
The next phase from that, obviously, is you send, a birthday card or a gift of some sort to these people.
The final piece: Mark Zuckerberg late last year talked about the fact that they thought they could do a pretty good job in search. And nobody's really talked about that, but it's easy to forget that Facebook actually has a search patent. It was issued to them in 2011. And they haven't launched this, but Facebook gets over a billion queries a day.
Q: What did you think of Facebook's big announcement last week? Many people were expecting something more.
A: The beta launch of Graph Search in the U.S. for desktops is a good first step toward a social search product. The full rollout won't be for several months and the initial revenue impact is likely to be minor through sponsored search results.
This will not replace Google's Web search over the near term, but over time, the proprietary information residing inside Facebook through user opinions will provide much more personalized and therefore relevant results. It will leverage the network of friends people have on Facebook and the information they can provide such as what travel destinations, movies, music, books or restaurants they "Like."
We see social search being another billion-dollar revenue opportunity at some point in the future.
Q: Can you put Facebook into a broader context in terms of what's going on in technology? You've watched this industry for so many years, can you tell me where we are in terms of the cycle in technology? Where are the growth areas of tech right now?
A: The PC industry, you could argue, got started in 1976 when Apple launched the Apple I. And over the years, they've gotten to this year, (when) you'll ship about 350 million or so PCs. The smartphone, Apple -- the first iPhone in 2007 -- you're going to ship 700 million smartphones this year, not just Apple phones, all phones. If you think about the tablet market, the iPad was only introduced in 2010. You're going to ship over 100 million tablets from all different vendors this year.
So, you're already at these huge levels with very little innovation having happened in terms of time to evolve these products. As people start to use that more, they're going to shift the way they consume content, access the Internet, etc. And tied into that is really what's going on with the PC market, which this year is going to have its first unit decline since back in 2001 when the tech market imploded. That's pretty amazing.
In addition to that, if you think about what people are doing on their smartphones and tablets, they're watching a lot of content. They're watching videos, movies, etc. So, what movies or television shows can I watch, that becomes a lot more valuable. When I was a kid, I'd wake up in the mornings with my brothers, turn on the television, there's three channels you could watch. And so the power was really in the hands of the distributors and it was all broadcast TV. Today, you've got thousands of channels between satellite, cable, broadcast television. And then you have all the Internet channels. And everybody wants to get the best content because they want you and me to watch their service.
And if you think about what we just talked about, ramping from zero smartphones in 2007 to 700 million today, ramping from zero tablets to over 100 million today, well, you're consuming a lot of content and you're consuming it at ever-faster speeds. So all of this is going to mean that these companies in the networking space, the Ciscos and the optical companies, networking companies, that have been basically in the dog house for two years, they're probably going to have a great year as we get past these mergers.
Q: So is Facebook your top pick in tech?
A: Yeah. It's my No. 1 pick in tech. An easy way to think about it is as follows: The stock came public at $38. They had no mobile revenues at the time. 2013, they probably get $1.5 to $2 billion in mobile revenue out of close to $7 billion in revenue. They'll have probably, at least, from the gifting program, $100 to $200 million in revenue this next year.
Bartiromo is anchor of CNBC's Closing Bell.
(c) Copyright 2013 USA TODAY, a division of Gannett Co. Inc.
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