5 Reasons Investors Should "Like" Facebook Stock

After years of skepticism, I'm giving Facebook a thumbs up. Here's 5 easy-to-understand reasons it's a solid buy for the near-term.

Jun 17, 2014 at 7:03AM

With every new earnings report, Facebook (NASDAQ:FB) is becoming more and more likable. Mark Zuckerberg also looks more like a savvy businessman -- able to put the right team around him -- not simply a silicon valley celebrity. He and his team have made Facebook into an advertising revenue juggernaut. At the moment, only Google (NASDAQ:GOOG) (NASDAQ:GOOGL) with $50.5 billion in annual ad revenues does it better.

Here are five reasons to "like" Facebook.

Depositphotos

Credit: Facebook

Facebook gets monetizing social media.
At the end of the 1990's, everyone seemed to be starting a dot com with no real plan on how it was going to monetize the companies. Most had a vague "Field of Dreams" strategy -- build it and the revenues and profits will come. Unfortunately, that didn't work out for most of the companies or investors.

When social media became the next big thing, many wondered if it was the dot-com bubble all over again. Brash and brilliant young guys or gals with amazing ideas, but no real clue on how to monetize the idea. Nothing wrong with that if it's a hobby, but to go public, ask investors to place their faith and hard-earned money in your coffers, and provide a growing return, a company needs more than a 3-minute elevator pitch. It needs a business model that generates revenue consistently. Facebook has proven it can do that. In Q1 of 2014, advertising revenues climbed 81.9% year-over-year. 

Facebook adds users consistently.
Facebook increased daily average users (DAUs) by over 20% from Q1 2013 to Q1 2014. From Q4 of 2013 to Q1 of 2014, DAUs rose 5.9%. Mobile users made up 76% of the DAUs, up from 64% mobile DAUs a year ago. It also grew monthly average users (MAUs) by 15%, 3.9% quarter-over-quarter. Mobile MAUs accounted for 79%, in Q1 of 2013 mobile MAUs stood at 67.6% of MAUs. Mobile only users comprise 31.6% of the MAUs. Simply put, more users equals more ad dollars. As Facebook keeps growing its user base ad revenues should increase too.

Facebook generates 90% of its revenue from ad sales.
Facebook generated $2.26 billion in ad revenues for Q1 2014 and $237 million from payments and fees. Advertising revenues accounted for over 90% of its $2.5 billion in revenues, while less than 10% was from payment and fees. 

Ad revenues should climb significantly over the next few years as advertisers currently spending a disproportionate amount of their ad dollars on media that is losing popularity, like print advertising, reallocate it to mobile ads. Currently, consumers spend 20% of their time on mobile devices, but advertisers only spend 4% of their ad dollars there.

Google and Facebook should reap a large percentage of the ad spend due to their large audience and ability to target ads and content internationally, nationally, regionally, and locally. As an added bonus look for former PayPal chief, David Marcus, to reenergize Facebook's messaging team and mobile payment efforts.

Facebook is launching initiatives to turn its 30 million small business users into paying advertisers.
Small businesses are discovering Facebook can help them effectively target prospects and generate leads. According to Facebook, 30 million small businesses across the globe have a presence on Facebook, but only one million are paying advertisers on Facebook. This gap represents a huge opportunity and Facebook is rolling out initiatives to train small businesses on how to advertise effectively on Facebook.

Facebook is easy to understand
Warren Buffett eschewed tech and Internet companies because he said, he didn't understand them. However, Facebook's business model is fairly straightforward. Most investors that can track how Facebook makes money and if it's growing or shrinking by calculating a few percentages. A quick review of key metrics each quarter can help you determine the trajectory of Facebook's operations.

The metrics include DAUs, MAUs, ad revenue growth and average revenue per user (ARPU). For example, if Facebook makes progress in mobile payments, total revenues and ad revenues will still go up, but be a smaller percentage of total revenues. If users and ad revenues keep increasing at a double-digit clip year-over-year, the value of the company should increase if it keeps costs in line.

A simple fool
Boiling companies down to a few simple metrics is not always doable, but if possible it gives you a fast and effective way to evaluate whether it's time to stay in or get out. Facebook, like many tech or Internet companies, is not a company you can buy and hold forever. The social media landscape could turn on a dime, but it is a solid bet for the next year and possibly longer if the numbers hold up. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Chris Brantley has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Google (C shares). The Motley Fool owns shares of Apple, Facebook, and Google (C shares). 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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