Is It Time to Take Profits For Facebook Inc. Stockholders?

Facebook (META -4.13%) stock has climbed 37% over the past year, outperforming the NASDAQ's 23% gain. However, shares have slipped 4% over the past month amid market uncertainties, leading some investors to wonder whether or not it's time to take profits. Let's compare the reasons for selling or holding Facebook stock.

Source: Pixabay.

Why some people are taking profits
Facebook's main weakness is its valuation. Its trailing P/E of 76 is much higher than the NASDAQ 100's ratio of 23. Facebook's higher valuation is justified by its higher growth, but it could also drop faster than "cheaper" stocks during a market crash.

Facebook's operating expenses rose 83% annually last quarter to $2.6 billion, which dragged its net income down 20% to $512 million. Facebook incurred those expenses to expand its ecosystem with new services and platforms for users and marketers. Last October, CFO Dave Wehner warned investors that the company was preparing for a 55% to 75% spike in expenses throughout fiscal 2015 due to increased investments in WhatsApp, Instagram, Oculus Rift, and other services.

A strong U.S. dollar will also weigh down Facebook's top and bottom line growth over the next few quarters. During Facebook's first quarter conference call, Wehner stated that its first quarter revenue of $3.54 billion would have been $190 million higher if foreign exchange rates remained consistent with levels from the prior year quarter.

Why you shouldn't take profits just yet
Facebook stock is pricey and expenses are soaring, but it still has plenty of strengths.

Unlike Twitter (TWTR) or LinkedIn (LNKD.DL), Facebook is consistently profitable on a GAAP basis. Its monthly active users (MAUs) and average revenue per user (ARPU) are also consistently higher than figures from the other two networks.

Source: Quarterly reports. *Reported as "active" members.

Facebook's MAUs rose 13% year-over-year last quarter as ARPU rose 25% -- a remarkable achievement for a site with a bigger population than China. Moreover, Facebook's average price per ad surged 285% even as ad views dropped 62%, due to its demand-inflating strategy of throttling the number of ads displayed each quarter.

Facebook is also crushing Google (GOOG -1.10%) (GOOGL -1.23%) on mobile devices, which generated 73% of its advertising revenue last quarter. Research firm eMarketer estimates that Facebook's mobile display ad revenues in the U.S. were more than three times higher than Google's last year. Facebook accomplished this by inflating demand and keeping all ads in a centralized location within its News Feed. By comparison, Google sells as many ads as possible, and its sprawling ad network is scattered across various platforms and sites.

Big growth opportunities ahead
More importantly, Facebook has several major sources of growth that haven't been fully monetized yet.

The first one is its Messenger app, which topped 600 million MAUs in March. That month, it added a peer-to-peer payments system to the app, and announced plans to turn the app into a "platform" similar to Tencent's WeChat and Naver's LINE. This means that the Messenger platform could be monetized through integration with other services, like e-commerce solutions, sticker sales, or sponsored accounts.

It also has Instagram, which had 300 million MAUs at the end of 2014. Citigroup estimates that the popular photo-sharing network, which introduced ads in late 2013, could generate $2 billion in "high-margin" revenues annually after being fully monetized. Investors also shouldn't forget about WhatsApp, which has 800 million MAUs but barely any revenue. If Facebook can develop it into a stand-alone platform or use it as a backdoor into China, it could unlock new areas of growth.

But that's not all -- Facebook is also expanding into VR headsets with Oculus VR, enterprise social networking with "Facebook at Work", the Internet of Things with Parse for IoT, and expanding free Internet to developing nations with Internet.org. All those moves indicate that Facebook could eventually evolve into something much more than a social network.

Facebook's solar-powered Internet drone. Source: Facebook.

Don't sell in the first inning
CNBC's Jim Cramer recently advised against selling Facebook stock. "This isn't the first inning," he stated. "They haven't thrown out the first pitch yet."

Indeed, Facebook looks like a huge company today, but it could get much bigger once all its investments in the future start paying off. If Messenger, Instagram, WhatsApp, and its other initiatives tether more users to the Facebook ecosystem and generate more revenue, investors who take profits today might regret it later.