Seriously, Buy Some Facebook Stock

Warren Buffett didn't buy Facebook (Nasdaq: FB  ) , and I have a feeling that if I told him I liked the stock, he might punch me in the gut. Actually, that seems to be the most common reaction to my mentioning the possibility that Facebook is a good company. But Warren would be wrong to punch me in the gut, even though everyone would applaud him for doing it.

Facebook is going to make money for shareholders.

Why would any sane person ever buy Facebook?
One hundred times earnings! A hundred! Google (Nasdaq: GOOG  ) , the greatest tech company known to man, only trades at 18 times earnings! What sort of idiot would be tempted to buy a company that overvalued? A company Warren Buffett has no interest in? A company run by some short dude in a sweatshirt?

I am happy to be that tempted idiot.

Let's dispel a myth or two. A hundred times earnings is a lot, but I've seen a higher IPO -- for the mighty Google itself. Big G IPO'd at 217 times earnings on its opening day of trading, and it had the gall to pop to more than 250 times earnings. So maybe 100 isn't "crazy."

Second, let's talk about revenue. Right now, Facebook makes its revenue through the sale of ads. In 2011, the company made $3.1 billion, or 85% of its total revenue, through advertising. Clearly, this is Facebook's current moneymaker, but let's look closer at the missing 15%.

That remaining $557 million in revenue came from Facebook's payment platform, which the company made mandatory for payment acceptance last year. Right now, it's mainly being fed by Zynga (Nasdaq: ZNGA  ) , but in the future, any payment made on Facebook will be processed through the homegrown platform. Let's take this knowledge and do a quick "what if" scenario.

What if the investing world is right and Zynga's competitive moat is about 4 inches wide and half that deep? Every Zynga-style company that Facebook partners with (Activision Blizzard, Microsoft, Electronic Arts -- you know, start-ups) can pull in upwards of $400 million -- Zynga alone contributed $445 million in 2011. There is an excellent opportunity for Facebook to turn its 900 million users into an army of app purchasers. From my perspective, the Facebook Payments platform is the true growth driver for the company.

And the rest
We haven't even touched on Facebook's brand strength and customer loyalty. Millward Brown's most recent brand ranking report places Facebook as the 19th most valuable brand in the world, just behind Amazon.com. The research firm estimates Facebook's brand to be worth $33 billion, a 74% increase on last year's valuation.

And now everyone is thinking, "This may all be true, but isn't it just like MySpace?" On the contrary, MySpace last boasted about its user numbers back in 2006, when they finally hit 100 million. That's no longer impressive. Heck, Twitter already has almost 600 million users. By the way, Facebook has tapped that frothy keg, too. Its seemingly crazy Instagram purchase has put it in every Twitter user's timeline. Instagram has more than 50 million users and is adding around 5 million a week.

Why are you not buying Facebook right now?
Facebook has a massive base of users, who spend an average of 400 minutes a month on the site. It has an untapped payment platform that generates income off the back of other companies' hard work. Its revenue grew 88% last year and 154% in 2010. If it were a country, it would be the third largest in the world by population.

No, my vote at the shareholders' meeting isn't going to stand in the way of Mark Zuckerberg doing what he pleases. No, there isn't any meaningful system of checks and balances on Zuckerberg. And yes, one of the founders has seemingly stepped into the Twilight Zone to save a few million in taxes. But here's the thing -- I just don't care.

Facebook is going to do really well. The stock might flounder around for a while, but in two years, you'll be rolling in returns. It should be noted that I don't even really like Facebook, but look at the thing. This is an excellent company that has changed, is changing, and will continue to change the way we look at the Internet and social interaction. It's a once-in-a-long-time stock, and I want in.

Trust me. I know plenty of people disagree with me, even some fellow Fools. The Fool's senior technology analyst certainly thinks he's identified another company in the social networking space whose potential outstrips that of mighty Facebook, which he details in our new research report. If you want to find out more about the company he thinks investors should buy instead of Facebook, grab your copy today.

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Fool contributor Andrew Marder doesn't own any of the stocks mentioned in this article. But seriously, he is going to buy some Facebook. No joke. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (33) | Recommend This Article (45)

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  • Report this Comment On May 24, 2012, at 9:27 PM, norm1834 wrote:

    "payment platform which the company made mandatory....."

    I joined the fools because of it's simplicity---

    so please don't assume we know this jargon--

    When in doubt, spell it out!

  • Report this Comment On May 24, 2012, at 9:40 PM, dontbeafool2 wrote:

    Facebook's stock is overvalued.

    At a Price-Earnings Ratio of 47, Facebook is at least two-and-a-half times as expensive as established technology giants like Apple, Google, Microsoft and IBM , not to mention broad indices like the Nasdaq-100.

  • Report this Comment On May 24, 2012, at 9:50 PM, TMFRedRam wrote:

    Hey Norm1834,

    Sorry about the jargon. Facebook has a system for making payments within itself. For instance: I have a farm in Farmville and I want to buy a duck (as a side-note, I don't play any of these games so the actual pieces might differ but the mechanic is the same). The duck costs $1 and I'm buying it from Zynga, the maker of Farmville.

    When I actually make the purchase, it's processed through Facebook's technology and Facebook takes 30% of the total purchase as a fee from Zynga. So every duck brings Facebook $0.30.

    Thanks for reading!

    -Andrew

  • Report this Comment On May 24, 2012, at 9:54 PM, EnigmaDude wrote:

    Interesting thoughts. Just the "brand value" alone is often underestimated in my opinion. Not sure I would buy FB in the $30s though, but when it drops into the $20 range I will definitely be interested. I think that will happen within a year.

  • Report this Comment On May 24, 2012, at 10:01 PM, EnigmaDude wrote:

    Very convincing arguments. Thanks for the great post!

  • Report this Comment On May 24, 2012, at 10:05 PM, jr0718 wrote:

    But what if ...all of your thesis doesn't come true, what are the risks? I would like to know your suggesstion of entry level, the risk/reward ratio for the long trade and time-line, as well as stop loss. Thank you.

  • Report this Comment On May 24, 2012, at 10:19 PM, MattTheRose wrote:

    Great article. Everything I've been saying from the start. Check out a similar article that absolutely proves that Facebook is going to be a great bet. Search the title "Why Facebook Stock will Upset the Naysayers"

    http://theamericanrose.blogspot.jp/2012/05/why-facebook-stoc...

  • Report this Comment On May 24, 2012, at 10:29 PM, vv234 wrote:

    Andrew,

    your comparison with big G's IPO p/e is not complete/valid: do you know what were Google's valuation and growth rate at it's IPO? Was it 100 billion dollar company when it IPO'ed with higher pe? Did its growth slowed at its ipo? Please do a real comparison.

  • Report this Comment On May 24, 2012, at 10:35 PM, TMFRedRam wrote:

    Thanks for reading everyone!

    Jr0718, the risks are real. As many people have pointed out, Facebook has limited physical assets, so a 'fire sale' is not going to raise a whole bunch of cash.

    If (keeping in mind I adamantly DO NOT think this is going to happen) it all goes pear shaped. Then the stock could crash. But that's the risk model for start-up tech companies.

    If you're risk adverse in a meaningful way (like if you can't sleep when one of your holdings drops 15% in a day) then this might not be for you.

    As in all investments, know yourself before you know the stock and only buy things that you can sleep comfortably holding.

    -Andrew

  • Report this Comment On May 24, 2012, at 10:40 PM, TMFRedRam wrote:

    Hey Vv234,

    Google was valued around $23 billion at IPO in 2004. It's net income grew 6% to $106 million in 2003.

    As everyone has pointed out, Facebook was around $100 billion and net income grew 65% to $1 billion last year.

    -Andrew

  • Report this Comment On May 24, 2012, at 10:41 PM, jhf678 wrote:

    There is always and has been doubters who don`t want to accept changes. However, sometimes changes are good for our economy and human development. Before Google there was Yahoo. Now I think it will probably be Facebook.

  • Report this Comment On May 24, 2012, at 11:14 PM, EdMeat wrote:

    Andrew-

    If you gave me $100 billion I could make you a super website that translates, interacts with the user, finds you activities that you like, has no "down time" and glitches, and really gives you an experience... Google is kind of like that. Facebook is nothing more than loading pictures onto a website and the user doing all the work. There is no experience.

    You are correct about not having a vote since Mark has the majority vote. This might not mean much to you but so many people have been upset with him and his direction, from stealing the idea, to kicking out the money backer, to selling personal information of users, and putting a stupid timeline that no one likes onto the site. If he has no friends after burning people up with this terrible IPO, and always making people angry time and time again, then is this the person you think will make great ideas become profitable? I think not.

    Like I said, give me $100 billion and I will build you something a billion times more powerful then Facebook.

  • Report this Comment On May 25, 2012, at 3:18 AM, somethingnew wrote:

    This is some decent analysis. I've been pondering fb but am not buying any in the near term. I decided to short it in caps and it's been a great decision so far. But I still wonder if investors are overlooking the possibilities of it. I definately wouldn't be interested in taking a big stake in it if I did decide to buy but I might buy a small stake as a speculative investment.

  • Report this Comment On May 25, 2012, at 3:20 AM, jesterisdead wrote:

    You got the idiot part right.

  • Report this Comment On May 25, 2012, at 3:28 AM, jesterisdead wrote:

    Points:

    -Over 100x earnings. Period.

    -Zynga-style companies will compete with the same market as Zynga. It's not additive. Think.

    -Facebook is just as capable of ending up like MySpace. The mob is fickle. Nothing anchors you there.

    -Is Facebook expected to grow by over 10x in as many years? That's the only thing that justifies a P/E of 100x+. Most stock prices equate to 10 years of annual earnings. I don't think so, Tim.

  • Report this Comment On May 25, 2012, at 11:39 AM, caltex1nomad wrote:

    Let me know when it hits $ 20.

  • Report this Comment On May 25, 2012, at 11:52 AM, bordereiver wrote:

    I am retail investor and have 900 shares at ave. 34.65. Let's see what they are worth a year from now.

  • Report this Comment On May 28, 2012, at 10:08 PM, lowmaple wrote:

    EdMeat Steve Jobs was not the nicest guy in the world either.

  • Report this Comment On May 29, 2012, at 6:54 AM, PeakOilBill wrote:

    Buy it if you like to gamble. Things go wrong in Europe, and FB could be at $10 next summer.

  • Report this Comment On May 29, 2012, at 11:00 AM, Lucaskasan wrote:

    My ear to the ground says FB users are becoming disenchanted in droves. I wonder what the rate of deactivation or abandonment is.

  • Report this Comment On May 31, 2012, at 2:35 AM, MikeMiloserdoff wrote:

    Here's an idea that might work. When it gets into the $17's and $18's per share (a more reasonable P/E valuation) buy it heavily, and ride the investment UP to the point of the low $40's, then sell it off to those who purchased at the IPO price, who will be even more wishful thinkers, to ride it up further. Kinda' like a tag team, only you will have bought low, and sold high, while they bought high, and want to sell higher...

  • Report this Comment On May 31, 2012, at 2:23 PM, cbutler619 wrote:

    I am admittedly a bit old school in my investing approach and I am a fan of Buffett...but...900 million users is a huge channel to move any new profit center through in the future. I did not buy Facebook for the company's current business model although I think it's fine. I bought it for the momentum 900 million users can bring forth in the future. "If it were a country, it would be the third largest in the world by population." I don't mind losing on this one if it doesn't pan out. The risk/reward ratio looks pretty interesting to me.

  • Report this Comment On May 31, 2012, at 9:55 PM, TMFAleph1 wrote:

    How are you obtaining a 200+ P/E ratio for Google on its first day of trading?

    Per the company's S-1, the trailing twelve months' diluted EPS was $0.72 and the stock never traded higher that $104.06 on its first day.

    P/E based on $85 IPO offer price : 118

    P/E based on $104.06 high price : 144

    http://www.sec.gov/Archives/edgar/data/1288776/0001193125041...

  • Report this Comment On June 01, 2012, at 11:25 AM, ems79 wrote:

    - 100X earnings... already pointed out that Google managed to be where it is today while hitting 2X that level.

    - Zynga... EdMeat said it's not additive... shows what you know! Of course it's additive. Just because you 100 people playing Zynga games today does mean those same 100 people will be split among everyone else. You probably gave a similar answer re: Atari vs. Nintendo in the early 80s...

    - "Give me $100bn and I can make a website too" ... yeah great, Google did that with Google+, GOOGLE fercrissakes the people who everyone is plugged into, and they haven't been able to make it work... Who uses G+?? Crickets chirping... FB is a brand and THAT MATTERS. Comparisons to My Space are apples to oranges, yup, they're both fruit but that's where's similarities end. We're also forgetting just how obsessed the average person is with playing with their smartphone today--everywhere you go people are on those smartphones constantly. It's the new TV. My Space was fine, but they didn't grow or monetize like FB has, they also did not have the benefit of being popular at time when mobile access to their site was so prevalent. It's like declaring soap operas DOA just because the first ones came out before TV's were in every home.

    Is FB going to be a big winner? Well, it already is. Am I going to risk a large chunk of my portfolio on them? No way Jose. How about 1.5%? Now we're getting somewhere. The mid-20s look attractive to me in all respects.

  • Report this Comment On June 01, 2012, at 12:33 PM, Mwn560 wrote:

    Facebook is currently worth about 13.50 a share, however if they were to offer an upgraded membership, maybe 2 bucks a month to not harvest your information or republish your photo's, I would be all in, and you had a choice. Either use it like you do now, or have a secure page for a few bucks, maybe teachers or professionals who don't want their info leaked, for a small fee you would be protected and insured. I really like FB, however I would like my security settings always updated to the fullest by FB. Wikifamilies has the right idea, however FB is where people like to communicate at.

  • Report this Comment On June 01, 2012, at 1:38 PM, MotoOutRider wrote:

    It is still very overvalued. Maybe once it get down to the $16-18 range I'd consider it!

  • Report this Comment On June 01, 2012, at 2:26 PM, Slinger812 wrote:

    This is supposed to be where one gets good investment advice???

  • Report this Comment On June 01, 2012, at 5:37 PM, GaranceD wrote:

    I doubt Facebook will disappear, but I also doubt it is worth the current stock price.

    You mentioned "brand strength" and "customer loyalty". I'm on facebook only because many of my relatives are on it. And pretty much all of my relatives are on it less than they were a year ago. Many of them are commenting that "it's nice, but I don't want to waste so much time on it".

    And as Facebook gets more determined to throw ads in people's faces, the people are less happy with it. I do not agree that Facebook has tremendous customer loyalty that it can bank on. For *some* customers it does, but not for all the customers that it brags about having.

  • Report this Comment On June 01, 2012, at 6:09 PM, ARTJI wrote:

    Andrew,

    I don't understand how you can advocate that people buy Facebook stock when you aren't doing so yourself. Do as you say, but not as you do?

    Plus, what's with this sentence, "No, my vote at the shareholders' meeting isn't going to stand in the way of Mark Zuckerberg doing what he pleases." Uh, you don't get to vote if you don't own stock.

    Your posting is part weird, part misleading, and pretty icky.

  • Report this Comment On June 02, 2012, at 1:34 PM, ragtimeMotley wrote:

    thanks! and as always the articles here are worth reading. The more dissension there is, usually, the more to consider, which always helps me to reach my own decisions.

    900 million users? are you sure? I've read different figures, some pointing out mulitiple accounts for single users, accounts that are groups... I don't know.

    I agree with the post that suggests interest is waning. That has been my experience also.

    My best guess is that the slogan, 'free, always will be' is, either directly or indirectly, headed for the chopping block.

    I'm looking at buy in at 5-6$ as it dips from 8-12.

  • Report this Comment On June 02, 2012, at 8:17 PM, GaranceD wrote:

    Here's another point. You mentioned:

    "Its seemingly crazy Instagram purchase has put it in every Twitter user's timeline. Instagram has more than 50 million users and is adding around 5 million a week"

    Why did Facebook have to buy instagram? It already had support for photos and albums, but it was some other company who was bringing racking up those customers. So Facebook paid something like twice as much for Instagram than the company had been valued just a short time earlier. In my opinion, Facebook was eager to pay that much because Instagram was being quite successful without any connection to Facebook.

  • Report this Comment On June 03, 2012, at 9:29 PM, Stockinv wrote:

    Show me some earnings and then I will decide. Too early to consider this *!#*

  • Report this Comment On June 08, 2012, at 11:42 PM, thidmark wrote:

    900 million users ... soon to be 899,999,999

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