Will Facebook Continue to Plummet?
Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many short-term traders have made nice profits from Facebook (NASDAQ: FB) thanks to the wild swings in its stock price. However, most long-term investors have been disappointed. Facebook IPO'd at $38, but it’s now trading at just $24. To make matters worse, this performance came during a time when the broader market continued its relentless ascent. Has the stock now been hit hard enough to make Facebook an attractive investment?
On the surface, this wouldn’t appear to be the case. Facebook is currently trading at 514 times trailing earnings and 31 times forward earnings. In other words, it’s still expensive, especially considering it only sports a profit margin of 1.22%.
Just to give you an idea of how unattractive Facebook is compared to one of its peers, Google (NASDAQ: GOOG) is trading at 26 times trailing earnings, 16 times forward earnings, and it has a profit margin of 20.92%. It might already seem like Facebook should be discounted as an investment option. But there’s more to the story here.
Facebook’s improved earnings and revenue
Facebook’s stock is down 9.73% year to date, but three of the last five quarters have been profitable, including the last two quarters.
You might be thinking that many companies throughout the broader market have been improving their bottom lines due to cost-cutting. But Facebook has also consistently improved its revenue on an annual basis.
Furthermore, revenue improved last quarter by 37.80% year over year. A lot of this has had to do with Facebook’s mobile ad revenue, which now accounts for 30% of total revenue. Thanks to the increasing popularity of smartphones and tablets, Facebook's mobile ad revenue should continue to grow.
Facebook’s improved traffic
Wasn’t Facebook getting stale? Wasn’t the younger generation opting for other social networking platforms? Unfortunately for Facebook, the latter might be true.
Younger audiences always want something new, because it represents their generation. Once a website becomes mainstream, it loses its “cool” identity. The most over-represented age group on Facebook is 65+. However, despite many younger people moving to other social networking platforms, Facebook has one again overtaken Google as the most visited website in the world.
That’s right. According to Alexa.com, Facebook is ranked No. 1 in the world and No. 2 in the United States. Those numbers are reversed for Google -- it’s ranked No. 2 in the world and No. 1 in the United States. As long as Facebook remains the most visited or second-most visited site in the world, its monetization opportunities are phenomenal.
The most over-represented education group on Facebook is Graduate School, compared to College, Some College, or No College. According to the United States Census Bureau, the average annual salary for people with a master's degree is $55,242 -- 30% higher than the average annual salary for people with a bachelor's degree, and 70% higher than the average annual salary for people without a college degree. Therefore, Facebook's monetization opportunities are good.
As far as Facebook’s traffic for the past three months, users are viewing fewer pages per visit, but spending 11% more time on the site. It's evident that Facebook’s content is interesting enough to keep people on the page.
Is Yahoo! catching up?
In a traditional form, Yahoo! (NASDAQ: YHOO) isn’t a direct competitor for Facebook. However, when Yahoo scoops up a name like Tumblr -- a microblogging site that hosts more than 100 million blogs -- Facebook should take notice.
Though the platforms of Facebook and Tumblr differ, this move shows that Yahoo! CEO Marissa Meyer is making a play at “cool.” According to Alexa.com, Tumblr appeals mostly to the 18-24 age group. Meyer also made a wise move by leaving Tumblr’s CEO David Karp in control. If Yahoo! were to take control of Tumblr, then Tumblr users would be outraged. Don’t be surprised if Yahoo! makes similar purchases down the road. If such acquisitions pan out, Yahoo! could steal users from Facebook.
The bottom line
Thanks to mobile advertising revenue, the long-term potential for Facebook has improved. The biggest and least spoken about problem for Facebook is the macroeconomic environment. If it continues to weaken, then Facebook’s ad revenue (in all forms) will decline. This would leave Facebook in a world of hurt.
Furthermore, with Facebook trading at 514 times trailing earnings, 31 times forward earnings, and sporting a profit margin of just 1.22%, initiating a long position at this time doesn’t seem justifiable.
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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. 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!