I'm Finally Facing It: Facebook Is a Buy

As a social media user and an investor, I finally "like" this stock.

May 6, 2014 at 10:30AM

I've finally gotten over my concerns about Facebook's (NASDAQ:FB) future risks and rewards. I've decided that as a user and an investor, I like this.

In addition to Facebook's huge market potential and blazing financial growth, it possesses a valuable asset in its core business: its vision for a connected -- and ultimately better, more transparent -- world.

I seek to find the stocks of the most stakeholder-friendly or positively disruptive companies for the Prosocial Portfolio. I'm trying to target a diverse array of companies that could change the world in myriad ways -- or at least move the needle closer to positive social and economic change across the globe.

So far, however, although social media has been a disruptive influence, I've lacked any stocks in that area. I've finally decided that despite some risks and controversies, Facebook actually is one of the socially admirable companies that could help transform the world.

A history of hotness
Strange but true, Menlo Park, Calif.-based college kid shenanigans made up Facebook's infancy. Who knew a mischievous Harvard hack might change the world (or at least make big bucks)? The immaturity of a "hot or not" informational service notwithstanding, Facebook has become one of the hottest services in the Internet's history.

They say with age comes wisdom, although founder and CEO Mark Zuckerberg is still fairly young, at 29). Today, what's hot about the service is its positive potential in our world, which he has occasionally eloquently voiced.

Facebook has matured, with profit and purpose in the DNA of its business -- an increasing business aim in the evolving world. In Zuckerberg's written words in his shareholder letter for the initial public offering:

Facebook was not originally created to be a company. It was built to accomplish a social mission -- to make the world more open and connected [inserted author aside: "and discussing hotness"]. We think it's important that everyone who invests in Facebook understands what this mission means to us.

Another disruptive tidbit:

... we're inspired by technologies that have revolutionized how people spread and consume information. We often talk about inventions like the printing press and the television — by simply making communication more efficient, they led to a complete transformation of many important parts of society. They gave more people a voice. They encouraged progress. They changed the way society was organized. They brought us closer together.

One of the less covered and more difficult areas to gauge at many companies is how a business affects suppliers. However, here's an indicator of a possible positive: In Facebook's case, it represents opportunity for developers, as long as their products and services catch on and stay strong.

Facebook's Payments option allows developers to charge for their products, with Facebook taking up to a 30% cut. Last year, this figure clocked at $2.1 billion in transactions, and that didn't even include mobile transactions.

Money: Investors "like" this
Facebook's 1.2 billion average monthly active users is mind-blowing . As of 2011 census information, that's the population of India as well as the equivalent of approximately five Canadas.

As of Facebook's most recent annual report on Form 10-K, average daily active users clocked in at 757 million, a 22% increase over the year before. Of those, on average 556 million people checked in on mobile devices, a 49% increase over the year ended December 2012.

It's no wonder that marketers want to hook up with Facebook. That's an eyeball extravaganza -- and a ton of living, breathing human beings. Companies increasingly must engage directly and transparently with consumers; the Internet and social media have opened up this dynamic.

On the basic level though, Facebook has two big things going for it: huge sales growth and profitability. It also has two other factors I appreciate: Facebook has stockpiled plentiful cash ($12.6 billion) and basically has no debt. Even better, Facebook's free cash flow: $2.8 billion last year.

A simple glance at Facebook's trailing price-to-earnings ratio may make value-minded investors shriek: its P/E ratio is 79. However, its PEG ratio is just 1.21. I view this metric as a wiggly launching point given its reliance on analysts' average forward growth predictions. In many cases, analysts will struggle to predict future growth because management vision will continuously and deftly evolve into new areas.

In other words, I sense a disconnect there: I believe that for long-term investors, it's actually cheap.

The litany of risks
We've already established that marketers are Facebook's paying customers. They represented 89% of its massive revenue last year. If users rebel or if marketers find social media advertising unsuccessful, reliance on that revenue channel is a huge risk.

Anyone who has thought about investing in Facebook thinks about rivals like Twitter (NYSE: TWTR), LinkedIn (NYSE: LNKD), and Google+. Granted, the latter doesn't look like a big contender, but Google (NASDAQ: GOOGL) has a gigantic pocketbook, a big reason to get its social media service into its interlocking stable of products, and a majorly talented workforce.

Very young social media users have started turning away from Facebook. Although Baby Boomers and Generation X are still engaged, the kids are finding other social media more compelling.

In addition, tackling emerging markets overseas to the extent it can do so is a continued huge opportunity -- and a big risk. Take China. According to Facebook's risk factors:

We may enter new international markets where we have limited or no experience in marketing, selling, and deploying our products. For example, we continue to evaluate making Facebook generally available in China. However, this market has substantial legal and regulatory complexities that have prevented this to date. If we fail to deploy or manage our operations in international markets successfully, our business may suffer. In addition, we are subject to a variety of risks inherent in doing business internationally.

Privacy concerns make up a large share of Facebook's biggest risks. In the past, Zuckerberg occasionally expressed a lackadaisical approach -- a sense that in the future, no one will care much about privacy on the Internet.

However, Zuckerberg has had a bit of a change of heart about privacy's ramifications recently. Earlier this year, he met with President Obama, having gotten passionate about the negative ramifications of government snooping. That may indicate a bit more sensitivity about people's personal data.

Enriching lives
I see Facebook's potentially huge benefits to society -- and a place that exemplifies the complex fabric of our own lives. Keeping in touch with far-flung friends through wonderful or difficult life events, traversing the globe through friends' descriptions of their vacations and travels, and even giving consumers a close channel for praising or condemning companies and services -- not to mention governments and tyranny -- are just a few.

Meanwhile, newer developments such as the recent acquisitions of WhatsApp and the Oculus Rift virtual reality headset may open far more growth than we can even imagine right now. These ideas may sound kind of crazy, but Zuckerberg may be crazy like a fox.

Social media is prosocial, not antisocial, and Facebook is a perfect example. It's time to buy -- with an eye on its long-term vision.

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Alyce Lomax has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook, Google (A and C shares), and LinkedIn. It also recommends Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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