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Facebook Short-Sellers in Front of ‘Freight Train’: Analyst

Wednesday, 23 May 2012 | 4:21 PM ET
Facebook IPO
Emmanuel Dunand | AFP | Getty Images
Facebook IPO

Investors looking to short Facebook stock are getting “in front of a freight train,” analyst Laura Martin of Needham & Co. told CNBC.

Martin initiated coverage of Facebook Wednesday with a “buy” rating and a $40 per share price target — that’s a 29 percent premium to Tuesday’s closing price.

Facebook traded higher in Wednesday’s session after a rough three days that saw the stock as high as $45 before dropping right through the $38 initial public offering price.

'Buy' Facebook: Analyst
Laura Martin, Needham senior analyst, explains why she has a "buy" rating and $40 price target on Facebook.

Today short-sellers got their first real crack at Facebook, but Martin advised against it in an interview on CNBC’s “Street Signs.”

“[Facebook] is a global platform,” she said. “There are four potential revenue streams.”

In Wednesday’s analyst note, Martin identified those four revenue streams:

  1. Payments: We envision a world where PayPal loses a portion of its revenue and credit card companies lose a portion of their fees to Facebook credits over time.
  2. Advertising: Advertisers can have home pages, apps and/or buy advertising on FB to try to engage with all of FB’s 900 million monthly active users.
  3. E-commerce: Certain online retailers allow consumers to identify the products or services that interest them by tagging them.
  4. Video Upside: We attended the Digital NewFronts in New York City in April and were struck by the enormous growth of original scripted premium video that is being produced in Hollywood, directly for the Internet.
The Facebook Fallacy?
Is Facebook's revenue model destined to fail? Michael Wolff, Vanity Fair, says we are looking at an existential issue at the middle of [Facebook]. "It's a business founded on advertising but advertising doesn't work that well in this medium," he says. CNBC's John Carney, weighs in.

One of the intangibles for Facebook, as Martin sees it, is the company’s brain power. Facebook has “the smartest people in America with the highest risk tolerance. We’ve seen [employee] exoduses from Yahoo, from Google, from the more established Silicon Valley juggernauts into Facebook, and they’ve had the pick of the litter for 3 years.”

Not everyone sees Facebook as positively as Martin, however.

In fact, Michael Wolff, contributing editor at Vanity Fair and columnist for The Guardian, wrote about what he calls “The Facebook Fallacy”:

At the heart of the Internet business is one of the great business fallacies of our time: That the Web, with all its targeting abilities, can be a more efficient, and hence more profitable, advertising medium than traditional media. Facebook, with its 900 million users, valuation of around $100 billion, and the bulk of its business in traditional display advertising, is now at the heart of the heart of the fallacy.

Wolff made his case in an interview with CNBC’s “Street Signs.”

—By CNBC’s Matthew J. Belvedere

Additional News: Nasdaq Seeks to Stem Damage From Facebook IPO
Additional Views: Facebook? Might as Well Buy a Lottery Ticket: Analyst

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CNBC Data Pages:

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Disclosures:

Disclosure information was not available for Laura Martin, Michael Wolff, or their employers.

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