How Microsoft Has Killed Facebook

Written by Jake Mann, WealthLift Finance Editor in Featured, Stock Analysis, Stock Market News | 1 comment

Death is an unpopular subject, and that’s saying it lightly.  While most of us have differing opinions on how we’d like to kick the bucket, it goes without saying that everyone would like it to happen quickly and painlessly.  Unfortunately, it seems as though Facebook (NASDAQ: FB) will not be afforded this fate.  Interestingly, this giant’s decay is not a result of its fluky IPO, falling stock price, or floundering user growth; none of these factors have mortally wounded the company.  The fatal blow, in fact, came with the announcement of So.cl, the brainchild of Microsoft (NASDAQ: MSFT).

Pronounced ‘social’, the newest buzz to hit the tech scene may be the most integrated social networking platform in web history. The site is going the exact opposite route that Google (NASDAQ: GOOG) went when they released Google+.  Instead of trying to compete directly with Zuckerberg and Co., Microsoft’s site is assimilating with it.  The best aspect of So.cl is that it doesn’t reinvent the wheel; it just combines every successful aspect of social media into a gigantic monster truck tire.  The site takes the best aspects of Facebook, Twitter, Pinterest, Digg, StumpleUpon, and Tumbler, and melds them into a surprisingly streamlined format.  Heck, there’s even a YouTube-like video player in the sidebar.

The most unique aspect of So.cl, though, is its search engine sharability.  Instead of simply creeping on the social lives of your friends, you can now share their deepest intellectual interests.  The site syncs with Microsoft’s Bing engine to allow friends to follow their peers’ reading habits, sports interests, and just about anything else under the sun.  Yes, Bing has only 15 percent of the search engine market, compared to 75 percent for Google, and 10 percent for Yahoo! (NASDAQ: YHOO), but MSFT has been nipping market share from YHOO over the past year.  In fact, the new Yahoo Axis engine is so clunky; this trend is likely to continue.

While Microsoft execs have stated that they do not view So.cl as a competitor of Facebook – they even allow users to sync their profiles across the two sites – that does not mean that FB won’t be hurt.  See, while so much hubbub surrounds the total user base that a social media site has, the most important statistics are: (1) the percentage of active users, and (2) average time spent on the site.  It is estimated that between 80 and 85 of Facebook’s 900 million users are active – aka visit the site once a day – though time on site has taken a sharp decline.

As of this month, a whopping 34 percent of FB users are spending less time on the site than they did at the start of 2012.  If this trend continues, expect the site to shed active users over the long run.  Imagine a future, say by 2015, where Facebook is merely a tool that lets users link between various sites like So.cl.  This would obviously not be beneficial to the company’s advertising revenues.  In fact, with So.cl’s ubiquitous approach to social media and search engine browsing, it has a chance at becoming the new home page for the next generation of youth.  Obviously, Microsoft would benefit the most from this prospective outlook, as the ad revenue would be theirs for the taking.

This would be icing on MSFT’s proverbial cake, as it recently reported yet another quarterly increase in advertising dollars, marking a streak of twelve consecutive such occurrences.  Specifically, ad revenues were up 9 percent, as the company cited a boost from its Bing engine’s growth and the launch of So.cl.  Currently, the site has not released the official size of its user base, though it has only been open to the public since mid-May.  In the six months prior, So.cl’s creators tested the product amongst college students, much like a certain someone that we came to love in The Social Network.

From an investing standpoint, Microsoft is a strong buy, even without the potential of its new site.  Since the recession, the company has grown its EPS (12.9%) at a faster rate than the industry average (12.1%), amid the aforementioned boost from ads.  It seems that this earnings growth may be fueled by increased efficiency, as MSFT currently sports 10-year highs in net (31.1%) and operating (38.8%) margins.  The tech company has also tended its cash hoard quite nicely, as its free cash flow has nearly doubled over the past five years, and currently sits at $27.6 billion.

Interestingly, the markets have yet to take notice, as shares of MSFT currently trade at a Price-to-Cash Flow ratio (8.1X) below the industry average (9.3X), and its own 10-year historical average (15.3X).  Turning to the Price-Earnings ratio, a similar story of undervaluation is told.  The stock currently trades at a P/E (10.4X) below the industry average (12.7X) and its own 10-year historical average (20.4X).  In fact, shares of MSFT have historically traded at an earnings premium of 20 percent above the S&P’s average over the past decade.  This year, they are cheaper, trading at a 26 percent discount.  Using a modest year-ahead EPS forecast of $2.72 in conjunction with the industry average P/E, a price target of $35 can be set by next summer.  MSFT currently trades around $28 a share, so an appreciation to this price would generate a quality return.

Going forward, its important for investors to keep an eye out on the user data of Facebook and So.cl – it may be a leading indicator that goes unnoticed by market purists.  If the first six months of 2012 are any indication, Facebook will struggle to keep its users active and online, which will give an opportunity to social media newcomers.  Given the ingenuity of Microsoft’s brainchild – and despite what the company’s execs will have you believe – it is conceivable that our children will know So.cl as the site that killed Facebook.

To learn more about the future of the social media industry and the economy at large, continue reading here.

Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours.  He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.

Jake Mann is a Finance Editor at WealthLift.com, having recently graduated Illinois Wesleyan University with a double major in Economics and Business Administration. In his spare time, Jake enjoys playing guitar, serving as Editor-in-Chief of the Undergraduate Economic Review, and being an alumni of Tau Kappa Epsilon.

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