Why Investors should hold on to Facebook’s Stock?

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

The social networking site ‘Facebook’ (NASDAQ: FB) launched its IPO on May 18, 2012. It was one of the biggest IPO launch in the history of internet companies with a staggering market capitalization of $104 billion. Several analysts termed it as “cultural touchstone”, as it was one of the most hyped IPO launch.

Soon the much awaited Facebook’s IPO was plagued with a series of problems. Morgan Stanley, its underwriter, faced claims of issuing shares in excess of demand. Additionally, practices of insider trading were also reported, which resulted in the share prices dipping to nearly 50% of its IPO value.

Aftermath

The aftermath of the IPO can be felt even after one year of its launch. The faith of investors in the company has declined significantly, as Facebook's stock crashed severely. After four months of its IPO launch, Facebook announced to buyback $2 Billion shares at 50% value of its IPO.

Furthermore, to clear its tax obligation, “Mark Zuckerberg” Facebook’s CEO, proposed to cut down the outstanding shares count by 101 million or by 4%.

To regain the investors’ confidence, CEO Mark Zuckerberg announced that he will not sell his stock in the company for at least one year. In contrast, directors Marc Andreseen and Donald Graham did sell some of their stock in Facebook, as a protection shield against tax bills.

During February 2013, Facebook’s shares witnessed another sharp fall of 12%, after enjoying an upward rally in October last year. Facebook’s stock has struggled to report any consistent pay-outs primarily due to company’s failure to gain from the growing popularity of smart phones and tablets.

Additionally, Facebook has also struggled to report any revenue growth since the launch of its IPO. This has led several analysts into losing faith in Facebook’s future, thus, downgrading its stock.

Competitive Landscape of the Industry

Facebook predominantly competes with Google (NASDAQ:GOOG) and AOL (NYSE:AOL) for display advertising. Google generates highest percentage of its revenue through PC Search Ads at around 61%. This is followed by mobile search ads at around 13%. The last couple of months have been extremely eventful for the internet giant with its stock price exhibiting high volatility, as it soared to an all time high of $831 and then back to its current level of $780.

Several investors recognize Mobile Search Ads as the most pertinent revenue stream for the company and a key revenue driver in the future. According to Gartner, revenues through Mobile Ads globally will surpass $11 billion by the end of 2013. Going forward, the revenue growth in Mobile Ads is expected to be in excess of 400% during the next five years. This highlights the importance of Mobile Search Ads for Facebook, as it needs to capitalize on the potential growth expected in the mobile space.

Similarly, Facebook also competes with AOL. AOL generates highest percentage of its revenues through Dial-up Broadband Subscriptions at around 32%, this is followed by Display Ads on AOL sites and Display Ads on third party sites at around 26% and 21% respectively.

AOL has a market cap of $2.9 billion and the current share price trades at around 88% of its 52-week high. AOL’s search market share has reported a sharp decline in past five years. The company reported an estimated internet search market share of 2% during 2007; however, by the end of 2012 the market share was reduced to 0.4%. AOL has been consistently losing ground to competitors such as Google and Facebook.

Facebook’s Future

Every investor who owns Facebook’s stock must question, if the company’s IPO fell by 45% in a very short span, then is there a consistent upside to its stock?

Despite the IPO debacle, I believe investors should hold on to Facebook’s stock for several reasons. It is imperative to highlight that Facebook has managed to increase its revenue share from display advertising, which now accounts for approximately 84% of its overall revenues. In addition, it also reported a 9% year on year increase in profits from operations.

In an effort to transcend on to other platforms, Facebook also acquired Instagram last year. The massive $1 billion acquisition of the photo sharing mobile application will enable the company to capitalize on the expected growth in the mobile space. The company is also experimenting with its revenue model, as it gradually transforms also into an e-commerce platform from being an exclusive social networking site.

Facebook now charges for  posts by offering the ‘Promote’ feature. This particular option is presently active in U.S and few other regions, however, if successful Facebook plans to offer this to users around the globe.

JP Morgan’s analyst “Doug Anmuth” revised the price target to $35 from $29, estimating a huge increase in revenues for Facebook through Mobile Ads. The revenue estimates for 2013 and 2014 were also pushed up by 6% - 7%, in addition, the EPS outlook for 2013 and 2014 was revised to 69 cents and 86 cents respectively.

I believe, Facebook has a massive opportunity to bolster its future earnings through the mobile space. During the past year, we have witnessed several initiatives to prop us sales from this division. Going forward, if Facebook successfully manages the mobile space, then I don’t see any reason why its stock cannot out perform all expectations.


Kiran Gulati 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!

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