Buy, Sell, or Hold: Facebook

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Facebook (Nasdaq: FB  ) today and see why you might want to buy, sell, or hold it.

The company probably needs little introduction, but Facebook was founded  in 2004 and is based in Menlo Park, Calif. With a market capitalization of about $55 billion recently, it has not even been trading on the open market for a full year, having had its initial public offering back in May.

Buy
One big thing Facebook has going for it is its massive size. That reflects several competitive advantages. There's brand value for one thing, as hundreds of millions, if not billions, of people know its name. There are economies of scale that it can take advantage of. And there are switching costs and a network effect, too. If you want to interact on a social platform, Facebook makes the most sense, as that's where most people, and therefore most of your friends, are. That will make it hard for you to leave, as well.

Facebook's great scale also means great potential profits. For every dollar it makes off a user, it collects $1 billion. The trick is in finding ways to make those dollars, and, ideally, to grow them over time. With more and more people shifting much of their online time from PCs to mobile devices such as phones and tablets, some have worried whether Facebook will be able to make much money in the mobile arena. Well, per its recently reported results, 14% of advertising revenue in its last quarter came from mobile ads. And its mobile monthly active users grew 61%, surpassing 600 million! The company has also made it easier for folks to use Facebook on Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) Android devices.

It's helpful to contrast Facebook with other new online-focused companies. Groupon (Nasdaq: GRPN  ) , for example, fueled similar IPO excitement and also fell hard after its debut. But its business seems far less defensible than Facebook's. It's no small thing for Facebook users to call it quits, but it's not such a big deal for Groupon users to find themselves using one or more competitor services more.

Lots of opportunities exist, with the company noting that it's "looking at premium services for businesses." LinkedIn (NYSE: LNKD  ) is an obvious target. It's the undisputed leader in professional networking and sports roughly 174 million  users, but how hard is it to imagine seeing Facebook set up a similar service, and being successful at it? Its new Facebook Gifts service shows the company starting to look at vast retail opportunities as well.

Sell
One concern with Facebook is that it's heavily dependent on advertising for revenue, with ads generating some 87%  of total revenue, up 36% from a year earlier. It's making its ads more effective, though, as it uses collected data to target the most promising users. Meanwhile, Facebook gets a sizable chunk  of revenue from partners such as gaming specialist Zynga (Nasdaq: ZNGA  ) , but Zynga is turning out to have some considerable problems, as it lays workers off and kills off some games.

The stock's valuation is another concern. When the IPO valued the stock at more than $100 billion, some balked. But now that its market cap is close to half that (reflecting a huge 19% one-day gain on its last earnings report), some still worry. Bulls will point out, though, that given its current steep growth rates, a steep valuation is not so unreasonable.

A big worry for many has been the several upcoming expirations of insider lockup periods. In other words, after its IPO in May, many insiders, such as employees, were not able to cash in their many allotted shares for set periods of time. (One lockup period expires on Oct. 29.) CEO Mark Zuckerberg, for example, holds hundreds of millions of shares. The worry is that if many shares are sold, it will send the stock price downward. To counter that fear, though, Zuckerberg has pledged to not sell his shares for at least a year, and he's also embarking on a big share-buyback program, valued at roughly $2 billion.

Management is worth thinking about, too. Zuckerberg has his fans and critics but generally isn't viewed as a seasoned executive. The company's IPO has been called the worst ever, for example. (Facebook is no stranger to hyperbole. It has also been dubbed "the greatest investing story of the next decade.") To his credit, though, Zuckerberg has brought in more experienced help, such as COO Sheryl Sandberg, hailing from Google.

Growth is another concern. Facebook has been growing at breakneck speed over its short life, but given that it reportedly has about a billion users and there are only about 7 billion people on Earth, about 2.5 billion  of whom are struggling to live on $2 or less per day, its room for growth does seem to be somewhat limited. Still, there is growth to be had, and Facebook has ousted the top dog in Japan, and has yet to really take on China, where "China's Facebook," Renren (NYSE: RENN  ) , might be worrying. Renren has more than 160 million  users so far and is looking to grow in e-commerce and gaming.

Another reason to steer clear is the reason Warren Buffett avoids many great companies: He doesn't have sufficient certainty about where they'll be in five or 10 years. We can be pretty sure that billions of cans of Coke will be quaffed in 2022, but will Facebook still be popular? Supplanting it won't be easy, but might it not happen? Developers, for example, are generally not bullish on Facebook's future -- though they may well be proven wrong. Especially because Facebook might be able to just acquire smaller upstart competitors.

One reason that some worry about Facebook's future is its propensity to frustrate and outrage its users, by its various privacy policies and practices, and even with redesigns such as its "Timeline" look. Its hundreds of millions of users include millions of spammers and fake accounts, too, some of which hurt the user experience of others.

Finally, there's pessimism aplenty, with our CAPS community of investors giving the stock just one star (out of five), and citing many concerns.

Hold (off)
Given the reasons to buy or sell Facebook, it's not unreasonable to decide to just hold off. You might want to wait for its price to fall further, or its revenue to be less advertising-dependent, for example.

The verdict
I'm going to pass on Facebook at the moment, but I'm generally optimistic about it and want to keep my eye on it. It may well end up in my portfolio one of these days, especially if the price falls significantly. Everyone's investment calculations are different, though, so do your own digging and see what you think. Remember that there are plenty of other compelling stocks out there.

There are additional critical things to know about this solid, though risky, contender for your portfolio. We've outlined them in our newest premium research report. Read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitterowns shares of Apple, Google, and LinkedIn. The Motley Fool owns shares of Apple, Facebook, Google, and LinkedIn and has options on Facebook. Motley Fool newsletter services recommend Apple, Facebook, Google, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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