Facebook is Rallying on a Rough Road
Nicholas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Facebook (NASDAQ: FB) is on the rebound, and investors are already raising their expectations for the social media company. Facebook has gained 56% since trading at an all time low of $17.55 in September. The company is now down 27% from its IPO price of $38 per share, which is a significant recovery from the 50% drop.
The company's recovery has raised numerous questions, especially given the circumstances under which the rally coincides with. Actually, few would have predicted a rally at this time. Facebook has unlocked 1.5 billion new shares during the recovery period, making them tradable on the NASDAQ stock exchange. A majority of analysts had predicted that the shares would flood the market, thereby putting pressure on Facebook's stock price.
However, Facebook has performed well against all the odds, and now people are asking questions. Some are wondering if the social networking giant would be able to sustain its unexpected rally, and for how long. The road map to anything close to its offer price is expected to be rough, but it seems as though anything above $30 per share is almost a certainty over the next two quarters. So, what exactly is driving Facebook's shares upwards? I believe both fundamentals and investor confidence is at play.
Facebook has enhanced its Ads business on the mobile platform, something that has been termed as the company's "Achilles" by a number of analysts. The internet-based company's mobile revenues represented 14 percent of the company's total revenue during the September quarter. Since then, the company has also launched a variety of revenue generation streams, including Facebook Gift Service.
Facebook Gift Service is an e-commerce oriented business unit that allows users to exchange gifts. The social media giant charges a commission for every gift sent via its platform. This service puts Facebook in direct competition with Amazon.com (NASDAQ: AMZN) the market leader in online stores. The e-commerce giant also does compete in the tablets industry with its Kindle Fire and Kindle Fire HD tablets. Amazon sells nearly all types of products on its online store while Facebook targets Gift products.
It would be difficult for Facebook to mount any challenge in the e-commerce industry, but its massive user base gives it great potential. However, for the meantime, Amazon and eBay (the other e-commerce giant) are in a class of their own.
Facebook's recently introduced Ad monetization campaigns also give it some strong fundamentals going into 2013. The social media company introduced Sponsored Stories, which according to analysts estimates has the potential to generate $1 billion annually worth of revenue. This type of advertising is in direct competition with Google (NASDAQ: GOOG) Search business.
The search engine giant also recently introduced Product Listing Ads (PLAs), which are cheaply priced compared to the Google AdWords. The company's new Ad platform is believed to be cannibalizing the AdWords space, which are more profitable as compared to the PLAs. Nonetheless, analysts are of the opinion that Facebook's Sponsored Stories Ad campaign is no threat to Google.
The Social Network giant has also launched a new e-commerce campaign, which targets the professional networking industry. Facebook launched its Jobs App as it seeks to rival LinkedIn (NYSE: LNKD) in the professional networking industry. However, it is expected that LinkedIn should prevail for the near term battle, with the long-term future up for grabs between the two companies. Once again, Facebook holds the potential to hold the lion's share of the market in the long-term due to its massive user base.
However, LinkedIn has a well established profile, which should prove a hard nut to crack. Additionally, Facebook faces a possible myth that a majority of its users may not be willing to mix their professional profile with their social profile.
Finally, Facebook Ad Exchange (FBX) is another strong catalyst for the company's performance. The social network giant introduced the platform in September. Interestingly, this is one kind of Ad campaign that does not need a Facebook user to be on the Facebook page for potential conversion into revenue. Notwithstanding, the campaign faces the risk of protests from users as it threatens to expose their privacy. The system uses Facebook members' data and information to redirect specific Ads to them whenever they browse the internet.
Facebook's trailing twelve-months profit margin stands at 6.28%, while the operating margin is at 12.13%. The company's most recent quarter revenues grew by 32.30% year-over-year. A majority of the analysts increased their price target to above $30 per share and maintained a buy rating on the stock.
Indeed, Facebook looks set to trade well above $30 in the near future, but the road is bumpy with a lot of headwinds to come. Facebook closed at $27.71 on Wednesday.
Nmaithya has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Facebook, Google, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!