Face(book) it. It's Time to Buy

By Jason Hall - September 28, 2012 | Tickers: FB, GOOG, LNKD | 0 Comments

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Facebook (NASDAQ: FB) investors have had a tough start.  After an IPO price of $38 (which went up to $42.05 on opening day) and a low (so far) of $17.55 on Sept. 4, early investors have taken a beating.  Even with a recent rebound, the stock would need to basically double for early investors to get out of the red. 

There are a lot of reasons out there as to why Facebook is a terrible investment:

• There's no competitive advantage, or "moat" as Warren Buffett would call it.  Anyone can create a social network website. 
• Mobile will kill them.  They can't make ad money on mobile.
• They need a "real" CEO, one that is focused on shareholders and growing the business.  After all, CEO Mark Zuckerberg even said in the letter (opens PDF) included with the S1 filing, "Facebook was not originally created to be a company."  Shouldn't the person running a company with a $40 billion+ market capitalization have a little bit of experience?
• It's just a fad, another "MySpace." 

I say the bears are full of bull.  Why, you may ask?

Just two words: Network Effect

With essentially a billion active users (those that log in at least monthly) Facebook has assembled something that has never been seen before.  To paraphrase Tom Gardner's (co-founder of The Motley Fool) words on one of the Motley Fool premium service's message boards: "never have so many been brought together in one place in human history."  In a nutshell, the more people that join and participate, the more people will join and participate.  Frankly, there is no easier, better way to share and communicate with so many people. 

This may just be the biggest "moat" out there: an incredibly sticky service.  Sure, there are options, like Google+.  Heck even MySpace is still around.  But the real question is, "why would users leave?  What would it take for there to be a mass exodus of users, short of finding out that Mark Zuckerberg was personally funding Al Qaeda? 

Mobile: risk, or opportunity?

Sponsored Stories is generating over $1 million per day.  This new advertising concept is much more "social" than regular page ads, and advertisers are reporting better response rates.  Additionally, the company is focused on making advertising even more social and connected to your circle of friends over time, which will make both advertisers and users happier. 

Focus on the shareholders, focus on the business?

Mark Zuckerberg is Facebook, and his laser-focus on the user experience, making mobile even better and adding features that users want, is the most important thing that can happen.  Keeping the "hacker" culture alive and well, and making Facebook a better place for users, and the advertising both less obtrusive and more targeted, is the key to growing the business.  And growing the business is the only way to grow the share price.  The only way to take care of the shareholders in the long run is to ignore the share price, and keep making the business better. 

Brave new world

If you are over 35, maybe you just don't "get" Facebook.  Those of us that had typing classes in school are part of a generation that remembers a life without being plugged in -- life without the internet.  We learned how to live with it.  The Facebook generation doesn't know a life without it.  When you looked at from that perspective, it changes things a little bit.  At least it did for me. 

Risks and opportunities

Facebook is being challenged by others.  Google's (NASDAQ: GOOG) Google+ has a growing user base.  But that user base leans towards those in the tech world, and has yet to establish mass appeal.  Honestly, I don't think I can name a single Google+ user that isn't also on Facebook.  The reality is that Facebook is likely a bigger risk to Google than the other way around. 

Mark Zuckerberg speaking at Disrupt 2012 earlier this month, regarding Facebook expanding into search:

“Facebook is pretty uniquely positioned to answer the questions people have. At some point we’ll do it. We have a team working on it.”

Does this make Google a dangerous investment?  No, but it's a solid reminder that even the strongest competitive advantages get disrupted, and usually from a direction that we don't expect...

Additionally, LinkedIn (NYSE: LNKD) has established itself as the preferred social network site for professionals, with more than 175 million users worldwide.  I'm on it, and I bet there's a good chance you are, too.  Additionally, LinkedIn has demonstrated a solid monetization of their service, both with recruiters and users, offering more access to information for a monthly fee.  However, there is clearly little risk of the two competing.  Actually I see the two services benefiting one another, as they offer very compelling ways to segregate work and personal lives. 

The reality is that Facebook has established itself as the place for people to connect, and there are few things more powerful than that.  Facebook isn't about Facebook.  It's about the human connection, and nobody does it better. 

Why now?

I bet that you noticed that there is no mention of fundamentals here.  No P/E ratios, forward-earnings charts, or other metrics to demonstrate the valuation of an investment in Facebook.  There's plenty of information out there that tells you why it's too expensive -- why you shouldn't buy at these prices.  I can only offer up one more compelling point to consider:

How many times did you check your Facebook while you were reading this?  Or if not yourself, how many times do you think your kids or grandkids did, at least in the past few hours?  The world has shifted to the social web, and Facebook is the sticky stuff right in the middle.

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