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Recently, I wrote about five stocks that I think have plenty of room to grow in the near future. I'll add one of these companies to my portfolio at the end of the month. With that in mind, I have decided to take a deeper look at each of the companies and identify three things about each one that I think make them worth additions to my portfolio. Last week, I discussed Amazon.com, and now I turn my attention to social-media juggernaut Facebook (Nasdaq: FB ) .
It's all about the MAUs
With its recent earnings release, Facebook announced that it was closing in on 1 billion monthly active users, or MAUs. But the future of the social network will be determined by how well it's able to monetize its users going forward. With average revenue per user, or ARPU, of $1.28, Facebook is trailing some of its competitors that make a living in the social-network space. If Facebook managed to get its ARPU on par with LinkedIn, for example, it would have recognized another $500 million in revenue during the recent quarter.
How does Facebook plan on raising its revenue per user? Facebook lives and dies through advertising -- 85% of its $3.7 billion in revenue last year came from ads. It uses the demographics of each user to use targeted advertising, hoping for clicks to generate this revenue from the advertisers. The rest of its revenue is generated through its payment system, which is typically just money spent to pay for the various games available on Facebook.
To reduce the reliance on advertising revenue, Facebook could go the route of eBay's (Nasdaq: EBAY ) PayPal service, presenting its payment option at checkout at various sites across the Internet. Not only would Facebook be able to charge a fee on the transaction, but it would also start gathering more information regarding its users' purchasing habits, which in turn could help improve the quality of its targeted advertising.
When Facebook initially went public, I thought it would use an inflated share price as currency and purchase related businesses, similar to the pre-IPO acquisition of Instagram. However, with the stock down nearly 50% from its IPO price, it might be a little more difficult to simply throw some shares at some tech company and hope it takes the offer. That said, Facebook still has more than $10 billion in cash on its balance sheet, and there might be a couple of companies out there that would make some sense to increase Facebook's growth potential.
One company often mentioned as a potential buy for Facebook is Zynga (Nasdaq: ZNGA ) . The mobile-game developer contributes 12% of Facebook's revenue, primarily through Facebook's payment system. With Zynga trading near an all-time low, it seems like the perfect time to wed the two companies. However, I think Facebook is content with the current symbiotic relationship they share, especially in light of a recent copyright suit Electronic Arts filed accusing Zynga of copying The Sims Social, which brings to question Zynga's ability to develop truly original games.
Another company mentioned as a potential acquisition target is Netflix (Nasdaq: NFLX ) . CEO Reed Hastings recently added to his small stake in the social network, and his membership on the board of directors shows that he's friendly with the company. A Netflix acquisition could turn Facebook into a portal to share movies with friends, and I envision hanging out digitally with friends and commenting Mystery Science Theater-style as we enjoy movies or television shows together. With Netflix currently trading within 13% of its 52-week low, now might be a good time to strike and end all the speculation.
It isn't even in China yet!
The final reason I think Facebook has room to grow is the lack of a presence in China. Despite not being allowed in the world's most populous country, Facebook has nearly reached 1 billion users. Imagine if 1.3 billion people in China had access to the system as well. The totalitarian regime in China still likes to maintain control over the flow and freedom of information -- Google's struggles with search are a prime example -- but there could be an option for Facebook to work out some sort of agreement with China, perhaps linking a restricted version of Facebook with Renren or SINA (Nasdaq: SINA ) and establishing a foothold with the Chinese consumer. SINA already has a portal that could work well with Facebook in Weibo, which would allow some of the 500 million Internet users in China to keep in touch with family and friends all around the world.
Is this enough?
Are these reasons enough to warrant the addition of Facebook to my portfolio? I've been watching the company since its April IPO, and its current low price makes it an intriguing option for sure. Over the next few weeks, I'll continue keeping an eye on it as I decide which company to add to my portfolio at the end of August. To see whether Facebook wins this portfolio battle, add it to My Watchlist.
To read another view on Facebook, feel free to grab a copy of our brand-new premium report on the stock. You'll be updated monthly on our analysts' insightful opinion of the stock for the next year. Get started now!