Self Restraint

Some scientists studying social media are confused because human beings display both an instinct for privacy and an instinct for publicity.

Frankly, it's not that difficult. For the vast majority of us concerning information about ourselves:

If it's obviously positive, it's okay to publicize it (by the way, get a friend to do so to avoid the appearance of bragging).

If it's negative, don't tell anyone.

If it's a two-edged sword (e.g., what may be "cool" with the young crowd would be frowned on by an employer), again, don't post it.

Outré behavior may seem to get all the pageviews, but such publicity works out successfully for very few people. Those prospecting for employees, spouses, and service providers look for self-restraint, not a desire for the spotlight. © 2013 Stephen Yuen

A Rising Tide in San Mateo County

Residents in our home County of San Mateo had the highest average salary in the nation during the fourth quarter of 2012. [bold added]

The federal Bureau of Labor Statistics last week reported that the average weekly wage in San Mateo County, California in the fourth quarter of 2012 rose an astounding 107% from a year earlier, to $3,240. That’s the equivalent of $168,000 a year, and more than more than [sic] 50% higher than the next highest county, New York County (better known as Manhattan), which came in at $2,107 a week, or roughly $110,000 a year.

According to the WSJ the county's stellar performance was driven by an average $1.1 million paid to 6,200 "computer systems design services" workers. The $1.1 million average in turn was skewed by Facebook employees recognizing stock-option income.

San Mateo County's top rank is temporary. In 2013, absent IPO income, our wage levels will settle down to normal; nevertheless they may crack the top-ten list. That's still impressive, considering that there are 3,140 counties in the United States.

Bay Area counties San Mateo, Santa Clara, and San Francisco are all in the top ten (source: BLS)

An Ineluctable Trend

Facebook earlier today announced Graphic Search, a quick way to search various subjects (e.g, photos of certain events, favorite restaurants, etc.) across one's circle of friends or even the vast Facebook community. The announcement met with only mild enthusiasm amongst investors.

The social network’s shares have fallen 3.1% since it announced Graph Search, a service that allows Facebook users to search for information from their friends’, and other users’, profiles.

Analysts say they broadly like the product, but most weren’t ready to adjust their views on Facebook just yet. As of Wednesday morning, no Wall Street analysts had changed their stock recommendations or their estimates for the company’s performance, according to Thomson Reuters.

As a user of tech products but not a fanboy, I stopped being an early adopter decades ago. Let someone else iron out the bugs and prove out the benefits, not to mention drive down the price as the product gains acceptance. Cellular telephones, digital video recorders, and flat screen TVs were all purchased by your humble observer years after they were introduced.

There's no out-of-pocket cost to being a member of Facebook, so the only investment for most users is the time spent posting original materials such as photos, writings, and videos to the network, as well as learning to use it. However, Graphic Search does not yet appear to be the obvious "killer app" that draws in new members or induces current users' eyeballs to linger.

More likely, the great Facebook attractor will be economics, as more employers perceive benefits from its use. One example is in the seemingly staid world of accounting, according to Mark White, Chief Technical Officer of Deloitte:

social tools such as microblogs, wikis, internal social networks, instant messaging applications and threaded discussion forums can help CFOs improve finance organization performance. “The financial close-the-books process is an example of how social software can drive improvements in finance’s decision-making and processes, by making the close more transparent, efficient, repeatable and defensible,” he says.

Much as we are fond of the old ways, the use of social tools and social networks is an ineluctable trend, even to accountants, who must keep up or be left behind.  © 2013 Stephen Yuen

Tim Cook Speaks

Apple CEO Tim Cook speaks to Brian Williams
About television: "It's a market that we see that has been left behind.....It's an area of intense interest. I can't say more than that."

About resuming manufacturing in the U.S.: "Next year we will do one of our existing Mac lines in the United States."

About Apple's mission: "Our whole role in life is to give you something you didn't know you wanted. And then once you get it, you can't imagine your life without it."

Okay, so the company isn't the same without the guiding hand of its founder. Yet, who other than Tim Cook should be at the helm?

Bill Gates, whose once-dominant enterprise has been struggling just to hold onto second place, Google's Page and/or Brin who are brilliant but maybe a tad unfocused, Mark Zuckerberg, whose company has yet to fulfill the extraordinary promise of its IPO multiple, or John Chambers or Larry Ellison, both of whom are experts at marketing to businesses, not so much to consumers?

Billionaire CEOs or former CEOs all, their companies' shares have not appreciated as much as Apple's since Steve Jobs died fourteen months ago.

Google: Unexpected and Disappointing

Google's third quarter results disappointed investors [bold added]:

Google posted a third-quarter profit of $2.18 billion, or $6.53 a share, down from $2.73 billion, or $8.33 a share, a year earlier. Excluding stock-based compensation and other items, profit fell to $9.03 from $9.72 a share. Revenue, excluding traffic acquisition costs, improved to $11.33 billion.

Analysts surveyed by Thomson Reuters expected earnings of $10.65 a share and net revenue of $11.86 billion.

Total costs jumped 71%.

Google had been on a roll. It continues to dominate Internet search and Internet advertising. Smartphones that use the Android operating system outnumber everyone else's. Well-publicized missteps by its rivals made it seem like we were in the age of Google, not Apple or Facebook.

Until today.

Net income per share, excluding stock-based compensation and other items, fell 7.2% versus the same quarter last year, instead of rising 9.6% as the analysts expected. The disappointing results sparked reassessment, and the stock fell 8%.

Sidebar: a big "oops" moment occurred when financial printer R.R. Donnelley & Sons disclosed the results three hours before the market closed:

The premature posting rattled markets, and led to a 2½-hour halt in trading of Google shares from 12:50 p.m. to 3:20 p.m. ET.

Believers in the semi-strong form of efficient capital markets may be cheered by this example of how quickly Google shares adjusted to the "right" price. Trading was halted for 2½ hours to allow market participants to digest the new information, yet the price remained about the same after trading resumed.

Flashback: nine months ago Google had a negative earnings surprise, and the stock fell $53.58 (8.3%) to $585.99. That would have been an excellent time to buy: GOOG is 19% higher, even after today's drop. I still have no idea whether it's a good investment.

Disclosure: I have positions in Apple but not in Google or Facebook.

The Chairman Speaks

Interesting quotes from a recent interview with Google Chairman Eric Schmidt:

“The Android-Apple platform fight is the defining fight in the industry today."

“These patent wars are death."

“Apple should have kept with our maps.”

On Microsoft: “It’s a well-run company, but they don’t make state-of-the-art products.”

In the interview Eric Schmidt repeated an earlier opinion that the four leading companies in tech are Amazon, Apple, Facebook, and Google.

Question: If you had to be a CEO again, would you choose Apple, Amazon or Facebook?

Schmidt: Which one has the most cash? That would be Apple.

Twelve years ago the top-company list might have included Yahoo, America Online, Microsoft, Cisco, Dell, and Intel, but not any of Eric Schmidt's current "Gang of Four." Google and Facebook weren't even public companies back then, and Apple could have been bought with Microsoft's petty cash. How times have changed.

Barron's: Making Another Call, But We'll Pass

In last week's cover story Barron's proclaimed that Facebook shares, which had closed that Friday at $22.86, were worth "perhaps only $15". FB shares promptly fell on Monday. (They did recover nearly all their losses later in the week when Facebook announced a new Gifts-to-friends product, which was not part of the Barron's piece.)

On 9/28 Facebook closed at $21.66, down 5.25% from the previous Friday.

Emboldened by last week's success, Barron's makes another call--this time bullish--on another widely followed company [bold added]:

Based on the likely outlook for capital-markets activity and Goldman [Sach]'s ability to continue growing its book value, it is easy to conclude that the shares could rise at least 25% within a year.

From Friday's close of $113.68, Barron's foresees GS popping to about $142. That target doesn't seem particularly aggressive in that it is well short of Goldman Sachs' peak in 2011:

Barron's does make a persuasive argument. Goldman's conservative market cap (90% of tangible book value), its deleveraging since the 2008 financial crisis, and the 1.6% dividend yield indicate a stock with little downside and much upside, given its leadership position in currently moribund global capital markets.

Goldman Sachs has long been on our watch list but we have never pulled the trigger. The financial sector is one of politics' favorite whipping boys, and Goldman is its most prominent player.

Barron's is probably right about the 25%, but we're just as likely to get that return in tech, commodities, and hard assets without as much headline risk. Pass, for now. © 2012 Stephen Yuen

Lowered Outlook

We were skeptical of Facebook's valuation last February. We knew that the $38 per-share IPO price was too high.

However, at some lower price we would get in because of Mark Zuckerberg. As we wrote in May,

If Mark Zuckerberg has just a fraction of Jobs-like genius--which I think he does possess--then Facebook is cooking up a few (pleasant) surprises that no one outside the company is expecting. If the price falls to $25 I'll be interested, and at $20 I'm definitely a buyer.

But I didn't buy FB, even when it dropped to $17.55. I've had to adjust my sights downward because of a lowered growth outlook, caused specifically by FB's inability to glean advertising dollars from consumers' shift to mobile. Barron's said today that Facebook shares are worth $15:

At its current quote [$22.86 at Friday's close], Facebook trades at 47 times projected 2012 profit of 48 cents a share and 36 times estimated 2013 earnings of 63 cents. Compare that with Google and Apple, two proven technology growth stories, which both trade for about 16 times estimated 2012 earnings. Facebook is valued at $61 billion, or $53 billion excluding its estimated $8 billion in cash. That's more than 10 times estimated 2012 revenue of $5 billion. Google trades for half that valuation.

What are the shares worth? Perhaps only $15. That would be roughly 24 times projected 2013 profit and six times estimated 2013 revenue of $6 billion, still no bargain price. Wall Street's consensus estimate for 2013 shows earnings rising 31%, to 63 cents a share.

If the above explanation is confusing, just focus on the two numbers circled in the "Current Year" column:

Earnings per share are expected to grow from 43 cents in 2011 to 49 cents in 2012. The six-cent increase represents a 14% growth rate. A good rule of thumb is never to pay a price-earnings multiple that is more than two times the growth rate (in other words, the so-called PEG ratio should be two or less). $0.49 [2012 EPS estimate] x 28 P/E = $13.72. In that light Barron's $15 is defensible.

If one believes that the projected 2013 EPS of 63 cents is reasonably solid, then one should probably buy Facebook even at Friday's $22.86. Paying 36 times earnings ($22.86/$.63) for a company growing at 31% is a value proposition. The price should settle in the mid- to high-30's, and the fact that it's not that high shows that most people don't believe the projections either. © 2012 Stephen Yuen