The Right Time to Buy Facebook

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shares of Facebook (NASDAQ: FB) have certainly been on a wild ride since the company went public in May of this year. From an IPO high of $45 on their first day, it fell almost nonstop to $17.5 in September, and after that they made an impressive comeback to the area of $28.5 lately. What has caused this rebound? Is it finally time to invest in Facebook?

The Problem

With more than 1 billion active users around the world, there is little doubt of the fact that Facebook is a very successful social network; the problem is finding a viable and sustainable way to make money from its user base.

Facebook has traditionally focused on advertising, but same clients have questioned the effectiveness of Facebook ads, and return on investment is something that has not been particularly positive for most advertisers on the platform. The mobile revolution means a big challenge for that business, and most of the company's traffic growth is coming precisely from mobile.

There were some encouraging signs in the last earnings release: Average revenue per user - a key measure of monetization effectiveness - showed an increase of 3.6%. Nothing too dramatic, but at least it’s moving in the right direction. However, Facebook is hardly out of the woods when it comes to making money via advertising.

Google (NASDAQ: GOOG) is the undisputed king in online advertising, and search is an ideal product for that business. The company has been aggressively expanding into display ads, which means a serious threat to Facebook's business model. Besides, Google is in a position of privilege to expand in mobile via its popular Android operating system.

If that weren't enough, Yahoo (NASDAQ: YHOO) is stepping up its efforts to monetize search under the new leadership of Marissa Mayer. The company has been consistently losing market share versus Google through the years, and it's now in a third position behind Google and Microsoft (NASDAQ: MSFT) when it comes to search queries. Microsoft, which was an early investor in Facebook, and Yahoo use the same Bing technology for search, so we could say that Bing has a very solid second place position in search queries.

There is more hope than fundamental improvements behind the recent recovery of Yahoo stock, rising nearly a 30% since September. But the company did report better than expected earnings in the last quarter. Both investors and Yahoo employees are becoming more optimistic and motivated under the new leadership, and the company could be another serious competitor for Facebook in the online advertising business.

Opportunities

Facebook is counterattacking Google and Yahoo with its own search engine, and its enormous access to user information could be a big asset when it comes to delivering specially targeted results. Which Mexican restaurants do my friends recommend? Nobody is in a better position than Facebook to answer that question.

Apart from advertising, one potentially explosive opportunity for growth is e-commerce. The company has recently launched Facebook Gifts for buying presents via the social network. This has the potential to become a very convenient service since it has important advantages versus other alternatives; you don’t need the user's address, Facebook handles that part. Also, the person is notified right when the gift is selected as opposed to having to wait for delivery; this makes the Facebook Gifts an ideal tool for last minute presents.

Facebook and birthdays go hand by hand. Please don't tell my friends, but I routinely check Facebook to see if I'm forgetting any important birthdays. Most people use Facebook as a birthday reminder and as a way to congratulate their friends, so buying a present via the same platform makes a lot of sense.

Facebook has access to a lot of personal information regarding users' tastes and opinions, which can be very helpful when it comes to recommending a present for someone. In fact, Facebook is one of the few companies in the world with enough information to challenge Amazon in that regard.

The online retailer has been very smart at developing Amazon Gifts and My Wish List as tools to help customers select a gift for someone. Facebook has the opportunity to take gift personalization to a whole new level if the company manages to efficiently capitalize on the gigantic amounts of information it has about its users. Shopping is becoming more social by the day, and Facebook is in a fantastic position to benefit from that trend.

Bottom Line

Facebook has not yet proven that it can monetize its user base on a consistent basis, but initiatives like Gifts look very interesting in that regard. If Facebook can build a profitable business in e-commerce, it will be the right time to accept that friend request from the stock.


acardenal owns shares of Google and Amazon. The Motley Fool owns shares of Amazon.com, Facebook, Google, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, Facebook, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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