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FB Fakeout — Don’t Buy Facebook Stock Because of Video’s Hope

facebook stock fbFacebook (FB) has been flying in 2013, with FB stock up 92% year-to-date and the Facebook stock price doubling since late July.

But FB investors need to take a cold shower, as the momentum of Facebook stock is starting to tilt the narrative into unrealistic territory.

While the migration to mobile and earnings surprises are nice, the forward P/E of over 50 is awfully rich, and some of the schemes to get FB earnings up fast enough to justify that multiple are farfetched.

Namely, I’m talking about video and related advertising as a way to justify Facebook stock price and the big premium for FB shares right now.

FB Video Isn’t an Easy Profit Source

The idea of Facebook as a video clearinghouse is tempting. But it’s elusive and complicated, meaning jumping into FB on these hopes is a risky endeavor.

The idea of the “second screen” income stream is very real for social media companies like Facebook and Twitter, where folks watch their favorite sitcoms or live sporting events and engage with friends on what they are watching. I’ll admit to personally tweeting my reactions during presidential debates in 2012 as one example of an television event that drives engagement on social media.

And coupled with the introduction of News Feed video ads, it’s not unrealistic to think that the big-picture plan for FB is to use much more video — from advertising to more video interaction between users to related functions like live-event participation.

But FB investors need to understand that the current News Feed endeavor is not without hiccups. For instance, the practice of putting “pre-roll” ads in front of videos has been proven to limit engagement, so while advertisers like the roadblock, many consumers refuse to even click the content if they know they are getting these invasive ads.

Online Video Ads Face Headwinds

And bigger-picture, video is not the end-all of online advertising. While online ad revenue is indeed growing, it’s not growing all that dramatically beyond the scope of broad web advertising dollars — hanging at around 6% of total spending consistently.

In other words, the lift to online video ads might be thanks to a lift to online ad spending in general over the last few years.

Last but not least, the profitability might not be all that much better for video ads on Facebook as the CPM rate — that’s cost per thousand impressions — is only slightly higher. A Bernstein Research note from last week indicates “effective CPMs for Facebook domestic video ads could be in the order of $7, which is actually not that much higher than the $4 to $5 CPMs Facebook already gets.”

And by the way, industry research shows broad trends pushing down CPMs across all video advertising — on Facebook, on Google (GOOG) property YouTube … everywhere.

So given the turn-off of pre-roll ads, the rather unimpressive growth of video ads broadly as a share of the advertising pie and the fact that Facebook rates won’t be dramatically higher… it might be a stretch to consider video the next frontier for FB.

If you like the growth story at FB or the mobile narrative that is pushing the Facebook stock price higher, then by all means buy.

But don’t jump into FB stock just because of high hopes for video.

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Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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