Facebook (FB 1.06%) is an extremely tricky stock to try to get a "long term" handle on. While the shares largely cratered at the IPO and for numerous months afterwards, an excellent earnings report drove the shares out of the $20's and it began a rather impressive run to $55 before pulling back. Now, what seems startling from a position of neutrality is that Facebook is extremely pricey at a market capitalization of $117 billion. While there are certainly arguments that could (rather easily) support a value well beyond this, the question is just how likely are those views to pan out?
Facebook is an "ecosystem" play with significant potential
The tech companies that become truly large/great are those that build impenetrable moats. While a company that supplies commodity microcontrollers as its core business isn't likely to be the next $100 billion name, Facebook is building an ecosystem.
The best analogy to this is probably Google (GOOG 0.73%). Google, at the end of the day, relies on people becoming increasingly dependent on its ecosystem of software tools and services, which includes the Android operating system, Google Search, Google Maps, Google Mail, and much more. Today the world depends on Google.
Facebook is interesting because it is in a very good position to build an ecosystem very similar to Google's. Facebook has the personal information, photos, and conversations of hundreds of millions of people. People rely on Facebook as an instant messaging client (both desktop and mobile), a place to share photos, and to even play web-based games with friends. This has made Facebook a superb platform upon which advertisers are willing to spend a significant amount of money to promote their products.
Facebook allows a depth of advertising not seen elsewhere
Think about an advertisement on television, or even as a flashing banner on a website. This might grab the user's attention and drive a sale of a particular product, but it's quite one dimensional.
However, an ecosystem like Facebook allows for much deeper advertisement. Have you noticed, for instance, that just about every major corporation has a Facebook page that can be "liked"? Have you also noticed that these companies also seem to hire PR/marketing representatives to actively promote products with colorful images, witty commentary, all while interacting with users?
This is very "deep" marketing and while it is not a feature unique to Facebook (Facebook's "moat" is that they're the largest, most popular social network), it is a unique characteristic of social media in general. That's really the issue, though – does Facebook have a truly sustainable moat, or is it vulnerable to any potentially new and "cool" new social networks?
A simple answer and a not so simple one
There are some troubling signs for Facebook. For example, the company noted on its most recent call that interest from teens was waning – uh, oh. While some could make the argument that it's really the adults that have swarmed Facebook are the real target (and they're the ones with the money, right?), many of these individuals could probably be just as well served with a combination of Twitter, LinkedIn, and perhaps a more dedicated photo sharing site. Certainly Facebook integrates a lot of this functionality into a one-stop shop, but it's not as though it's a real chore to "move" from one website to another on a modern computing device.
Foolish bottom line
Facebook's tale has not yet been written and there exists a lot of uncertainty about its future prospects. While it may end up ultimately building an ecosystem that is as sticky as, say, Google's is, there's also the risk that Facebook ends up becoming more like a Yahoo.
The parallels are all there – Yahoo was a search giant, and it provided (and still provides) just about every Internet service that anybody could want from stock message boards to a great instant messaging client. But it, too, wasn't immune to the harsh reality that "moats" are much harder to build through websites than through physical products.
That's why Facebook is tricky. It could double, or it could eventually trade at less than one-third of its current value, and that's a bet I'm not willing to take.
