3 Reasons to Buy Facebook Now

It was another ugly week for Facebook (Nasdaq: FB  ) , as fears of lock-up expirations and general disdain for the once-ballyhooed IPO continue to weigh on the stock.

The stock has shed nearly half of its value since going public at $38, but so much more has been lost. Facebook's credibility is taking its share of body blows, and it's hard to find too many analysts willing to promote bullish arguments for the smacked-down social-networking website operator.

Well, I'm going to give the bullishness a shot.

1. Does anyone remember when Google was a $52 billion company?
There are plenty of similarities between the IPOs of Facebook and Google (Nasdaq: GOOG  ) . Both companies ran into regulatory stumbling blocks on the way to going public. Both dot-coms had to settle for a lower IPO price than they were originally gunning for. They both went out of their way to get individual investors in on the freshly minted shares.

However, Google started out with a market cap of $23 billion and was at $52 billion two months later. Facebook started at $104 billion and three months later is a $52 billion company.

Google took a couple of months to climb up to $52 billion -- Facebook had to climb down to get there -- but let's take a look at both companies when they were $52 billion creatures.

Facebook is now trading for 30 times next year's earnings. Where was Big G as a $52 billion company? Well, Google went on to earn $1.5 billion on $6.1 billion in revenue the year after it went public. Facebook? Analysts are expecting a profit of $1.7 billion on $6.4 billion in revenue. The numbers are fairly similar. But Google went on to quadruple its market cap seven years later. Facebook probably won't fare that well. Google wasn't so expensive in retrospect -- was it?

2. Indexing to the rescue
The Wall Street Journal ran a story over the weekend, detailing the inevitable indexing of Facebook.

Even at half of its IPO price, it would be a shock if Facebook isn't added to the Nasdaq 100. It could happen as early as next month, but the more likely timeframe is December, when the exchange adjusts its lineup. Don't let the fisticuffs that flew between Facebook and Nasdaq (Nasdaq: NDAQ  ) over the sloppy IPO cloud your judgment. Nasdaq defines its popular metric as a gauge including "100 of the largest domestic and international non-financial securities listed on The Nasdaq Stock Market based on market capitalization." So this is pretty much a sure thing.

The S&P 500 isn't a lock to add the world's largest social-networking website to its more widely followed club of equities, but that, too, could happen -- probably shortly after the Nasdaq 100 inclusion.

As big as Facebook is, having the $35.5 billion in assets across Nasdaq 100 index funds and ETFs -- and eventually the $514 billion in assets for S&P 500 trackers -- buying corresponding chunks of Facebook will help. At the very least, it will make the lockup expirations easier to swallow as institutions gobble up gobs of the public float.

3. Sponsored Stories is a game-changer in mobile
A big knock on Facebook earlier this year was its inability to cash in on the smartphone migration. As a desktop application, Facebook can run ads on the right side of the pages it serves up. But the display area is too narrow to populate with money-making advertisements on smartphone screens.

Sponsored Stories has changed that. A company can now pay Facebook to make events more prominent in someone's news feed -- in other words, if someone checks into a specific restaurant or "likes" a particular musical artist.

The approach is working, too. Facebook revealed in its latest conference call that Sponsored Stories is on a $1 million-a-day run rate, and it's now generating $500,000 in ad revenue a day from mobile usage.

And it will get bigger. There's a viral component to the product. Active Facebook users have probably been seeing when one of their friends likes Target (NYSE: TGT  ) this summer. The Sponsored Stories customer pays to have the act featured on mobile and desktop news feeds, and the ad also reminds all of the other friends that have "liked" Target's fan page in the past.

As a possible sign of things to come, now Wal-Mart's (NYSE: WMT  ) a Sponsored Stories customer, too. The world's largest retailer obviously couldn't let the cheap-chic discounter get all of the attention. Expect to see this happen across categories.

You may have also heard that we're in an election year. You might have seen Barack Obama pop up as a Sponsored Stories entry. It's only a matter of time before Mitt Romney's camp follows suit.

Sponsored Stories turns a potential weakness at Facebook into a strength.  

A world of opportunity
Burned by the Facebook IPO? You're not alone. But that doesn't mean the stock should be avoided forever. Down 50% in the past three months, Facebook is getting close to levels that make it an attractive buy. Before you do anything, make sure you check out our brand-new premium report on Facebook, where we run through the key opportunities and challenges in store for its shareholders. The report includes a full year of updates,so you'll always be up to date with the latest analysis. Claim your copy now.

The Motley Fool owns shares of Google and Facebook. Motley Fool newsletter services have recommended buying shares of Facebook and Google. 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story 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 (1) | Recommend This Article (3)

Comments from our Foolish Readers

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 August 20, 2012, at 10:22 PM, vv234 wrote:

    My takes on the 3 reasons:

    1. Invalid: there have been so many articles/comments that have disqualify the comparison between FB and GOOG. It's the weakest point to bring it up again here.

    2. Possible. Joining Naz100 index definitely will help the price but I am not sure it could offset the dilution from the the expiration of the lock up period.

    3. It depends. If the sponsored stores are relevant to the users, then it could have some positive effects for the ads. However, just like the sponsored search results used by search engines in the early days, if you mix them with the relevant organic search results, users 'd be pissed off which reduce the effectiveness of the ads and more importantly the usage of the service. It all boiles down to the relevance of the ads/stories. Given that FB is mostly about the display/branding ads, not like the search related ads, I doubt the relevance of sponsored stories could be high. Therefore it may turn out to be very negative for FB mid-long term.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1990195, ~/Articles/ArticleHandler.aspx, 12/21/2014 3:59:16 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement