Facebook (NASDAQ:FB) stock has been on a tear this year, up 38%. At close to twice its IPO price of $38 from just two and a half years ago, some investors may be wondering how much higher the stock can go. Even more, some investors may even be considering shorting the stock. But they shouldn't.
Some companies just aren't short material
And Facebook's one of them.
Sure, Facebook's valuation looks incredibly optimistic -- and possibly borderline euphoric. The company has price-to-earnings and price-to-sales ratios of 72 and 17.5, respectively. Compare that with Google's P/E and P/S ratios of 27 and 5.4. But there is good reason for the optimism surrounding Facebook stock. Facebook deserves its premium valuation. Consider these three factors the company has going for it as solid reasons not to short the stock.
1. Growth is monstrous. Yes, monstrous. Just take a look at the year-over-year growth in Facebook's advertising revenue.
In the company's most recent quarter, advertising revenue was up a whopping 64% from the year-ago quarter. Sure, that's a downtick from previous quarters, and it appears to be a part of a broader trend of slowing growth, but it's still huge growth.
Even more, Facebook's scalable business model is lending meaningful operating leverage to the social network's operating income. Year-over-year growth in operating income has significantly outpaced revenue growth for four quarters in a row. Consider Q3, for instance, when Facebook's non-GAAP operating income grew 78% on total revenue growth of 59%.
2. Facebook is here to stay. The company has a tremendous network effect working in its favor. While the social network's 1.35 billion monthly active users shows just how many people are using the service around the world, its 864 million daily active users shows just how powerful this network really is. When it comes to daily active users, no similar social network comes even close.
A network effect is arguably one of the strongest competitive advantages a company can have. The strength of a network effect in keeping competitors at bay is that every additional user makes the network even more valuable. In other words, no competing network will be able to quickly offer the same usefulness to members since any Facebook competitor will likely start with a significantly lower number of daily active users.
3. Facebook can reinvent itself. Now that Facebook already has hundreds of millions of users on board, it can use technology to evolve with the times. Already, the company has acknowledged that it doesn't see the future of Facebook stuffed into one tiny blue app. This is one of the thoughts behind the company's Creative Labs, an effort to build different stand-alone apps that look to both create new ways to connect and share and to build on current Facebook features, like Groups, in a dedicated separate app.
"We just think that there are all these different ways that people want to share," Facebook CEO Mark Zuckerberg said in reference to the company's Creative Labs effort in a Bloomberg Businessweek interview earlier this year.
Zuckerberg seems willing to do whatever it takes to ensure that the company can reinvent itself where necessary, even if it means spending billions of dollars. The company's first major acquisition was of photo sharing app Instagram, helping the company gain instant clout in a fast-growing online photo sharing space. The price tag of $1 billion looked expensive at the time, but now it looks like a bargain. Since then, Facebook has also purchased cross-platform messaging app WhatsApp and virtual reality goggle-maker Oculus -- two companies Zuckerberg says will play key roles in the Facebook's social presence in the long-term.
Facebook's willingness to reinvent itself wherever and whenever necessary means new catalysts for the company could be just around the corner at any time.
Shorting a bad business with a negative catalyst could make sense. Shorting a good business probably isn't a good idea. But shorting a great business with positive catalysts, like Facebook, may be downright crazy.
Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook and Google (A and C shares). 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.