10 Reasons to Still Believe in Facebook

The de-friending process can be pretty swift and fierce on Wall Street.

Shares of Facebook (Nasdaq: FB  ) took a beating yesterday after posting uninspiring quarterly results. Sure, it wasn't a great report. The leading social-networking website didn't deliver the blowout quarter that winning investments tend to deliver in their first at-bats as public companies.

However, there's plenty to like at Facebook. You just need to know where to look.

1. There are 955 million monthly active users. Remember the studies indicating that Facebook usage appeared to be peaking in some of its more established geographical markets? Well, Facebook membership grew by 29% over the past year, and the company made it a point to emphasize that the growth was across all key countries -- including the U.S., with 3 million new members over the past three months.

2. Sponsored Stories are helping monetize mobile. One of the bigger challenges for Facebook is mobile monetization. Leading app developers rely on Millennial Media (Nasdaq: MM  ) to serve up graphical ads to cash in on their free downloads, but having to sift through display advertising to read through a news feed on a small smartphone would kill Facebook.

The company's solution has been Sponsored Stories, a product that allows companies to reach out to people -- and their Facebook connections -- that already like the marketer. It's working, as COO Sheryl Sandberg revealed that the Sponsored Stories platform alone was at a run rate of $1 million a day by quarter's end, with half of that revenue coming from mobile usage.

3. There's $10.2 billion in the bank. Even if it translates into less than $4 a share in cash, Facebook's 11-figure cash hoard is more than just a floor for the stock. If the going gets rough, Facebook will be able to opportunistically snap up smaller companies when stock isn't the desired collateral.

4. Instagram is working. Few people were happy to see Facebook agree to shell out $1 billion for the photo-sharing app, but it has gone from roughly 50 million users at the time of the acquisition to 80 million users now.

5. There's nothing wrong with simply meeting expectations. There may be nothing special about simply matching the profit of $0.12 a share that Wall Street was targeting for the second quarter, but it does mean analysts have a fair read on the company. Go out to 2014 and 2015, and the profit targets stand at $0.62 and $1.00 a share, respectively. Going out three years for an earnings multiple of 24 may seem like a stretch, but it's not so outlandish if Facebook keeps growing at a heady clip.

It also is worth pointing out that smaller corporate-centric social-networking website operator LinkedIn (Nasdaq: LNKD  ) trades at nearly double Facebook's 2015 earnings multiple.

6. There's no Zynga fever here. Ad revenue grew 28% at Facebook, and that means non-advertising revenue grew even faster. Remember when investors were smacking down Facebook earlier in the week after social-gaming leader Zynga (Nasdaq: ZNGA  ) posted disappointing results? That seems silly in retrospect. Facebook is clearly riding a lot more horses in this race than Zynga.

7. Sponsors are paying more to generate leads on Facebook. Investors weren't happy when Google (Nasdaq: GOOG  ) revealed that advertisers were paying less per click through its market-leading ad network. Thankfully, Big G is making up the difference in volume. Well, Facebook is winning this war on both fronts. The company's 28% pop in ad revenue -- accounting for 84% of all revenue -- is the result of an 18% uptick in ads and of having marketers pay 9% more per ad.

8. Mark Zuckerberg showed up. After a spotty attendance record at investor events leading up to the IPO -- and his oft-criticized wardrobe choices -- Facebook's co-founder and CEO attended Thursday night's conference.

9. Facebook isn't afraid to invest for the long haul. One of the reasons for Friday's selloff was that analysts didn't like the company's commitment to investing heavily in growth in the near term. Some companies may use this as a scapegoat to mask a lack of organic growth, but Facebook's at that point in its life cycle where it makes sense to dive into strategic acquisitions.

10. Facebook hit a new all-time low on Friday. It was easy to blast Facebook as overvalued when it went public at $38 two months ago, valuing the company at a stiff $104 billion. A string of new lows later, and Facebook's stock has shed more than a third of its market cap.

Even if you believe Facebook isn't cheap, at least naysayers can concede that it's at least no longer as expensive as it used to be.

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The Motley Fool owns shares of LinkedIn and Google. Motley Fool newsletter services have recommended buying shares of LinkedIn, Google, and Facebook. We Fools may not 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns shares of Millennial Media and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (10)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 28, 2012, at 5:45 PM, Ogoing wrote:

    Facebook had a solid quarter. Wall Street has sky high expectations. Facebook proved that it can do good business, grow user base, make profits and find new ways to monetize. It is a real company. What's not to like? Give it some time. With over 1 billion users worldwide (soon), Facebook revenue and profits can only go up! Add to that China entry (hopefully this year). Many other businesses would love to be in their shoes...

  • Report this Comment On July 28, 2012, at 8:10 PM, aj87654321 wrote:

    To your 10 reasons I ask you the following questions:

    When was the last time you paid any attention to any of the ads put up on FB site (let alone clicking on them and buying stuff from the sponsor)?

    More importantly, how likely will you be paying attention to similar ads when you access your FB account from a Smartphone or IPAD?

    I rest my case.

    The inevitable downfall of FB to a market cap of $4-$5 billion (or about $2-$2.5/shr) will be completed in 18 months (if not far far sooner).

  • Report this Comment On July 28, 2012, at 8:56 PM, ArilleLee wrote:

    10. Facebook hit a new all-time low on Friday

    This is the reason to sell not buy. 80% of stock hit all time low see price drop another 20% to 30% in the next two months.

    I can only give one reason why FB will drop more, the reason there're so many people come out now to pump it like crazy is because they are still holding them and desperately need to unload them. If they plan to buy more, they would not pump, they will wait the price to drop and then buy and then pump.

    If they start to pump using desperate measures, even giving out reasons that is obvious laughable, that means, they are very scared and they desperately want out.

    That means, buyers have dried up and sellers are still plenty.

    Result of this is more drop to come.

  • Report this Comment On July 29, 2012, at 5:14 AM, LifeForceDance wrote:

    Facebook is terribly overvalued. It might be worth ten dollars a share.

  • Report this Comment On July 29, 2012, at 9:08 AM, dlagewaa wrote:

    quote There are 955 million monthly active users. unquote

    Which would mean that everyone with a FB account logs in once a month.

    I suppose this will be the case when hell freezes over.

  • Report this Comment On July 29, 2012, at 2:03 PM, aj87654321 wrote:

    And I give you 2 reasons for not believing in any of the 10 reasons this article suggesting to believe in Facebook:

    1) Facebook is a fancy message board where people go to B.S their heads-off with friends and strangers. They do not go there to buy stuff (as people do when going to Amazon.com). Hence online ads will not work on FB. Ask yourself: When was the last time you paid attention to any ad on FB (let alone clicking on it and buying stuff from the advertiser). Hence, soon advertisers will realize they are being taken for a ride and will either pull their ads out all together (as in GM), or will not pay premium prices for putting up their ads.

    2) Any company whose CEO goes on honeymoon in the mist of his company's crash, and repeatedly having claimed publicly that FB's primary mission is NOT to make money but rather to bring people together, should give second thoughts to any sane individual wanting to put his or her hard money into the FB stock.

  • Report this Comment On July 30, 2012, at 12:45 PM, StopPrintinMoney wrote:

    FB could "potentially" make billions in ad revenue per day!!! Why not shell out $300/share today in hopes these dreams may come true at some point?

  • Report this Comment On July 30, 2012, at 12:57 PM, TMFBreakerRick wrote:

    aj, and when's the last time that you clicked on a TV or radio ad?

    Google's text-based contextual ads may be click-based, but there's also a world of display advertising and ads that may not seem like ads.

    Case in point, Sponsored Stories. I bet there are folks that have seen a friend like Amazon.com or Target as part of Sponsored Stories, clicked on it, yet they still believe that they have never clicked an ad.

    Saying Facebook will head lower is popular, but suggesting that its market cap will fall to half of the cash on its balance sheet defies logic unless profits turn into cash-sucking deficits soon.

  • Report this Comment On July 30, 2012, at 1:16 PM, FoolishLonghorn wrote:

    Like to many of the analysis articles on Fool.com, this one fails to look at the financial fundamentals.

    Facebook's P/E ratio this morning is about 127.

    And it pays no dividend.

    Any company with such a lofty evaluation is going to need to grow at an incredible pace to justify that price.

    Is Facebook a good company with excellent opportunities for continued growth? Yes, it is.

    Is Facebook going to grow at a rate that justifies a PE well north of 100? Probably not.

  • Report this Comment On July 30, 2012, at 5:33 PM, ScottPletcher wrote:

    I still think it's way overvalued at today's price. And I certainly wouldn't buy until after a significant percentage oif the insider shares are sold off.

    At the 91-day point after the IPO, [~Aug 17, I think] insiders are able to sell 268 million shares of stock. Between 91 and 181 days after the IPO, insiders can sell an additional 137 million shares. And then after 181 days following the IPO, another 1.2 billion shares are free to be sold.

    That's a total of ~1.5B shares to be added to the ~650M share float out now, more than tripling the float.

    There are also strong allegation that the "active users" numbers have been "fudged" by FB.

    In conclusion, I, too, think FB will settle to ~$10-$12/share, then move up from there. I would only *re-evaluate* [no guarantee] buying in at less than $12/share.

  • Report this Comment On July 30, 2012, at 7:21 PM, ftsmd wrote:

    Just like Apple in its infancy, Facebook may have many hurdles to make before it gains acceptance with the business community. But unlike Apple, its CEO has complete control and depending on how Zuckerberg envisions the future success of this company, he will be inclined to deliver on it much sooner than it took Jobs, who was forced to quit before realizing what's good for Apple to become what it turned out to be today. With that in mind, I tend to buy a little at a time at pullbacks, thus lowering my cost basis, should it keep on falling.

  • Report this Comment On July 30, 2012, at 11:10 PM, maiday2000 wrote:

    The "nearly 1 billion users" is a myth. There is ample evidence of hundreds of thousands of users with multiple and/or fake accounts. Entrustet found that 150% of 20-24 year olds have an account. Plus, I have seen a number of my own "friends" just delete their account in the past 3-4 months. Privacy is back in vogue.

  • Report this Comment On August 14, 2012, at 5:06 AM, thidmark wrote:

    I'm pretty close to deleting my own account

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