Facebook Is a Long Term Buy
Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The shares of social media giant, Facebook (NASDAQ: FB) took a hit recently amidst worries about lock-up expirations. The stock is down 5%, very likely, due to an oversupply of new shares entering the market. This is not surprising at all, because employees and other insiders wanted to lock in profits, as the shares are up about 50% from the all time lows of September.
This short term sell-off should not be of concern to any rational and intelligent investor, as it does not change any fundamental nature of the company. At the end of Q3 2012, Facebook has managed to remove a lot of question marks, and investor queries regarding the long term monetization strategy of the firm. Based on Facebook's current positioning, it is a solid long term buy, and probably has one of the widest moats in the Technology space.
Eight Key Drivers for Facebook in the Long Run
1) Value Proposition for Advertisers: With more than a billion Monthly Active Users who constantly upload and update new data, the targeting ability of Facebook is immense. And it comes as no surprise that this end user targeting capability generates a very high ad ROI, in many cases, return on ad spend was 5 times or higher. Such high rates of ROI has resulted in a 27% increase in the number of ads delivered, along with a 7% higher price per ad.
2) Mobile Position: Facebook is well positioned in mobile to capitalize on changing mobile usage. Mobile ads have a run rate of more than $600 million dollars on Facebook, and very likely it will shoot much higher, as it starts to roll-out more ads on Mobile News Feed. Also, Facebook didn't start monetizing its Instagram Mobile audience of more than 100 million users, and the company will likely lay out plans to monetize its Instagram Business, which will translate into hundreds of millions of dollars in incremental revenue. According to comScore, in the U.S., users spend more mobile time on Instagram than on Twitter.
3) Getting into the Search: Mr. Zuckerberg has publicly stated his intentions to enter the search engine business, and he has a leading partner to do so, Microsoft's (NASDAQ: MSFT) Bing. Search is a very lucrative market and a huge market. Facebook has the potential to multiply its top line, if it enters the search market. Search ads have significant reach and are highly targeted, and this makes them very attractive to a broad range of marketers. The dynamic duo of Microsoft and Facebook, can perhaps give Google (NASDAQ: GOOG), a run for their money.
4) Payments and Fees Division: Facebook has managed to spin away from excessive dependence on one developer, Zynga (NASDAQ: ZNGA) and it has managed to grow its revenues from other developers. Currently, ~40% of the top 400 apps use Facebook's software development kits (SDKs), and in the future, there will likely be a lot more revenue flowing in from more social apps.
5) Building a Hiring Platform: Facebook has already made inroads towards building a Hiring Platform, by building out a Social Jobs App. In the future, if it changes direction and builds out a full fledged Platform, it can pose material threats to social media rival, LinkedIn (NYSE: LNKD).
6) Taking on Mom-and-Pop Businesses: A staggering 12.8 million small and local businesses have business pages on Facebook. In addition to traditional ad products, Facebook has unveiled a new product called Promoted Posts, to monetize this group, and more than 300,000 posts were rolled out. The Local Advertising is a huge industry, and Facebook has a huge edge relative to competitors like Groupon and Google to tap into this group.
7) Monetizing Gifts: Facebook has just launched Facebook Gifts, which allows users to send gifts during special moments in their lives such as birthdays, weddings, anniversaries, etc. More importantly, Facebook Gifts is a great way to test the waters for an eCommerce Platform in a Local and Social Context. This represents an immense monetization strategy in the long run.
ishfaque has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, LinkedIn, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, Google, LinkedIn, 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!