I’m Buying Facebook and Here Are Three Reasons Why

Matthew 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 taken a well-publicized beating since going public earlier this year.  I personally wasn’t going to touch a stock with a hundred billion dollar valuation and a massive monetization problem.  Now that things have calmed down and the valuation is cut in half, I’m changing my tune and buying the stock.  Here are three reasons why I think now’s the time to buy.

They’ll Figure Out a Way to Make Money

Mark Zuckerberg is a driven man, even more so now after his company’s stock has taken a pounding.  With an installed base of over 900 million users they’ve got a lot of ways to monetize their users.  We all think that advertising is going to be their meal ticket but that’s not necessarily the case.  Consider professional social network LinkedIn (NYSE: LNKD).  Their Hiring Solutions business and Premium memberships were developed because of the rich data set they’d stumbled upon.  There is absolutely no stopping Facebook from heading down the path of monetizing their user base.  They’ve already turned ads into a multibillion dollar revenue source and they have many options to further monetize their users in the future.

The big news lately has them dabbling into Google’s (NASDAQ: GOOG) turf by rolling out a social search engine.  Zuckerberg said that they’re already fulfilling about a billion search queries a day without batting an eye.  To be able to search for a restaurant or product that your friends like and can recommend is a much easier sale to convert than reading through recommendations from people you don’t know or trust.  Add a little financial incentive in there and companies will gladly pay for those referrals.

Ten Billion Dollars Will Plug a Lot of Holes

Having a big war chest to simply go out and buy what you need can’t be overlooked.  Sure Apple (NASDAQ: AAPL) has a war chest bigger than most third world counties that they let sit idly but most of their tech brethren have found that sometimes it’s cheaper to buy than build.  Take Google’s shopping spree which has included Android, YouTube, Motorola Mobility as well as more than 100 others.  Even LinkedIn has gotten into the shopping mode picking up Slideshare among others. 

For Facebook, they could go one of two ways with their cash pile, they could either burn through it by paying obscene valuations for companies like Instagram or be more like Apple and LinkedIn and quietly acquire nice bolt on technologies.  What’s important is that the war chest is there to buy what they need to build out platforms to monetize their massive user base. 

Open Ended Future

One of the great opportunities we have by investing in founder lead tech companies is that where they start is not always were they end up.  Is Amazon (NASDAQ: AMZN) an online bookseller?  Sure, but they also now sell you the tech gadget to read those books as well as millions of other products.  What about Apple, are they still a computer company?  Absolutely, but they also now sell the world’s most popular phone and tablet.  Is Mark Zuckerberg the next Jeff Bezos or Steve Jobs?  I’m going to answer with a resounding “maybe” and that’s the allure of Facebook.  There is just enough promise that they can continue to disrupt the world in similar ways as their eponymous website has.   

So where does Facebook go from here?  That’s the hundred billion dollar question.  Maybe it’s in social search or a deeper dive into social gaming.  Maybe they partner with or compete against Amazon as a product recommendation engine.  More than likely it’s in a direction we can’t currently even make a connection with.  That’s what I like most about Facebook’s open ended future of possibilities that is only limited by the creativity of the young man that’s developed the platform that’s now connecting the world.  I like his chances. 

The Trade:

I’m sure you’ve heard the phrase “go big or go home.”  Well, when considering an investment in companies as polarizing as Facebook you need to dig in if you’re going to make a bold buy.  That’s why I’m not going to simply buy the shares; I’m going straight for their options.  For my virtual “No Drip, No Mess” portfolio I’ll be buying a January 2014 $23 call for around $450.  This represents an allocation of about half a percent of the portfolio’s total value.  However, the implied leverage on a “look through basis” is about two and a half percent which is more than enough to matter.

I like this trade for two reasons, we get all the upside of Facebook above $27.50 a share over the next fifteen months however, we’re only risking $4.50 a share.  Further, the capital at risk is coming from income generated from dividends and written options meaning it’ll make less of a mess if I’m wrong. That's an open ended future I can live with.

Finally, a word about the risk, if Facebook’s shares are below $23 at expiration I’d lose the $450 I put up and if shares are below $27.50 I’d be looking at a loss on this trade.  That’s why I’m only risking capital I’d be comfortable losing which is where the strategy of the “no drip, no mess” portfolio really shines.  By using options strategically I’ve learned how to invest better and this trade is a prime example of doing so with less risk.

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latimerburned owns shares of LinkedIn and Apple and has the following options: Apple. The Motley Fool owns shares of Apple, Amazon.com, Facebook, Google, and LinkedIn. Motley Fool newsletter services recommend Amazon.com, Apple, Facebook, Google, and LinkedIn. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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