Market Overview

Will Facebook Become Irrelevant in 2012?

According to a Bloomberg article, 625,000 new users join Google's (NASDAQ: GOOG) social network, Google+, everyday. At this rate the service would have a total of 400 million users by the end of year 2012, which would make it a serious competitor for Facebook.

Ancestry.com co-founder Paul Allen posted a note yesterday saying that he expects the number of Google+ users to grow, as more and more people are using Android smartphones. He also pointed out that as Google+ becomes more popular, the number of invitations to friends and family members will go up, further accelerating the growth. Google's spokesperson told Benzinga that the company does not provide any comments on the future expectations around its products.

The shares of Google have outperformed S&P 500 in 2011 being up nearly 8 percent. Google is also trading near its 52-week highs, which can be attributed to the popularity of the company's Android operating system. Furthermore, strong Google+ user numbers could help boost the stock even higher in 2012.

A rapid expansion of Google+ could be bad news for Facebook, which is expected to go public in the first quarter of 2012. Currently, Facebook with nearly one billion users is the sole leader in social networking, but this situation could be changing. Additionally, the rise of a serious competitor could hurt Facebook's estimated valuation, which according to recent reports, is as high as $80 billion.

The decline in Facebook's valuation would also be upsetting to Goldman Sachs (NYSE: GS), GSV Capital (NASDAQ: GSVC), and Microsoft (NASDAQ: MSFT) who have invested in Facebook.

After all, the user satisfaction plays a key role in determining the future or social networking. Therefore, the traders should pay a close attention to any new updates the two competing services roll out and listen to the users' reactions, as these may be the best indicator of which service will be the winner in the long-run. For example, Facebook's new timeline feature has received mixed reactions from its users, which might provide an opportunity for Google+ to catch up with Facebook.


ACTION ITEMS:

Bullish:
Traders who believe that Google+ will catch up with Facebook might want to consider the following trades:
  • Increased user base means higher advertising revenues, thus, Going long Google might be a profitable play.
  • A more diversified option is First Trust DJ Internet Index Fund ETF (NYSE: FDN). Google makes up 10 percent of the fund's holdings.
Bearish:
Traders who believe that Google will never become a notable player in social networking may consider alternative positions:
  • Google is expected to announce official Google+ user numbers with Q4 earnings release. Buying February puts could be a good way to profit from disappointing numbers.
  • Buy shares of Facebook when the company goes public.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

You can follow me on twitter @TuomoKallio

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