Mobile Money: Facebook, Google, Yahoo & Apple Reads

From: Nicole Urken
Sent: Wednesday, October 24, 2012 4:54 AM
To: James Cramer
Subject: FB

Mobile progress key, accounting for 14% of ad revenue (in 2Q, mobile initiatives were not fully rolled out)

From: James Cramer
Sent: Wednesday, October 24, 2012 6:00 AM
To: Nicole Urken
Subject: RE: FB

You know what stood out on this call versus the previous one? Raison d'etre. The rationale for believing that these guys are true capitalists who aren't just trying to build a social network but are building a social based advertising network that, after initially being blindsided by the mobile revolution is now ahead of it.

The domain of textual analysis is usually left for English courses, but combing the verbiage of CEOs on conference calls can be very key for understanding the movement of a stock and why tides may be turning.

Facebook's Mark Zuckerberg is case in point. Contrasting the latest quarterly conference call with the previous quarter is a telling, as the Facebook story transformed from an ethereal business model description to a real understanding of a mobile strategy. Zuckerberg said in a recent interview he liked being an underdog, and he did indeed prove naysayers wrong this past quarter.

Let's take a closer look.

First, he started with strategy pin-pointing the most important drivers for investors: (1) "to build the best and most ubiquitous mobile product," (2) "to build a platform so that every new app that gets created can be social and enable people to share," and—most importantly from a stock perspective: (3) "to build a strong monetization and economic engine to build Facebook into one of the world's most valuable strategies."

Second, he gave specifics—especially on mobile which he noted is the "most misunderstood aspect of Facebook today," as investors underestimate the potential given that monetization per time spent on mobile should surpass desktop.

Monetization product specifics? (1) Mobile App-Installs, which provides distribution to help developers increase discovery of their apps, (2) Facebook Exchange which improves targeting capabilities so it's easier for marketers to reach their customers and so that ads are relevant and interesting to people on Facebook, (3) Gifts, which could bring more commerce to Facebook over time, (4) Custom Audiences—introduced in early September—which helps marketers user their customer list or other data to target Facebook ads in a privacy protective way, (5) Offers—reintroduced about a month ago—which provides businesses a new way to acquire new customers and drive loyalty, (6) Promoted Posts.

Third, he acknowledged past mistakes versus "pretending" that all had been good. Zuckerberg acknowledged they were late in the game on mobile but also highlighted that the company is in early stages of a big opportunity. Zuckerberg noted the company really didn't have a mobile strategy—in fact it was just rolled out in March. And I quote: "The most important thing to understand here is that we're just getting started on this." But just after six months of ramping up mobile ads, already 14 percent of ad revenue this past quarter was from mobile.

This all stands in contrast to the more general overtones of the company's first conference call as a public entity.

So what now? While the stock could withstand some of the upcoming lock-up pressure, you likely will see some more attractive entry point opportunities. So look for those given the increased certainty now associated with the name.

Who else is a mobile advertising play? Keep Millennial Media in mind, which helps companies monetize their mobile ads and which just rose on its secondary offering. Facebook doesn't use them quite yet, but down the road could, not to mention other names. Yahoo has seen a recent run-up for the same reason: monetization catalysts for its core business (with mobile focus!) and beyond. The company remains well-positioned with the Alibaba stake on the sale path at last and with Marissa Meyer at the helm who is focused specifically on developing the company's key verticals in its core business. The stock has had a big run, but should still be able to hit $22, as we outlined in our recent sum-of-the-parts analysis back at the beginning of October. If you want to look for more value, it is worth considering Google, which sold off big last Thursday after its premature third quarter report showed decelerating revenue growth and margins. That said, cost per clicks were down less than in previous quarters. Ultimately, if Facebook can figure out mobile, Google should be able to as well, and the current valuation offers an attractive entry point.

Of course, Apple leads the mobile revolution with its (newly expanded) ecosystem of products. While its quarter yesterday provided good fodder for the bears, the recent drop leading into the quarter from $700 to $600 well factored in risks, not to mention its cheap valuation of 9.5x ex-cash forward P/E. The key positive—and most important—aspect of the quarter was strength in iPhone unit sales (58 percent year-over-year growth 26.9 million vs. 25 million expected). And, CEO Tim Cook was optimistic about the supply picture for the iPhone 5 going forward. While iPad results were disappointing, the stock remains a buy ahead of a big product cycle story and into the seasonally strong holiday season. Yes, uncertainty remains, but Apple's downside guidance remains typical for the company, and the lowered gross margins should hit a trough next quarter. That said, the stock is likely in a trading range here until we get more clarity on the margins, demand, and supply capacity. But long-term this remains a buy.

We know that personal computers are at a stand-still—we don't have to look further than Hewlett-Packard, Dell, Intel, and Advanced Micro Devices, not to mention Microsoft in the software space, which is desperately trying to make some progress with its Windows 8 launch. Mobile is the answer and monetizing that mobile driver remains key.

The bottom line: EBay has been the darling that has been able to embrace mobile, but Google after sell-off and Yahoo on any pullbacks remain interesting to keep in mind. Apple is a long-term buy despite uncertainty. And Facebook just may have turned things around – look for attractive entry points to come in.

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