I'm With Mark Zuckerberg, Are You?

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

If you ask me, I probably spend over a few hours on the social network website, but survey statistics say an average user spends around twenty minutes daily per visit on Facebook (NASDAQ: FB). That counts for something for a social networking company, don't you think?

Since Facebook's filing for IPO on Feb. 1, 2012, the company has been through a lot of speculation, and needless to say, the stock price has seen some severe ups and downs in these last few months. On May 18, the stock's first day close was at $38.23. It dropped to a low of $17.73 by September, a fall of a whopping 53.34%! Since then, the price has recovered by over 57.5% and it is currently trading at $26.81 (at the time of writing). Don't go by the percentage numbers, since they can be deceiving, but looking at the upward momentum one has to wonder whether this is a strong trend or not.

Let's look at the technical aspects of the stock first.

(click to enlarge)

Looking at the chart above, the RSI signal is still under 70, which means the stock is not yet overbought; but it doesn't have much room to go up as well.

But let's look at it from another point of view. Facebook's price-to-book ratio is 13.76, in comparison with SINA Corp's (NASDAQ: SINA) 2.81, LinkedIn's (NYSE: LNKD) 18.29, and MeetMe's 1.32. It must be understood that SINA primarily serves Chinese communities, mainly in China, where Facebook is blocked by the government. 50% of MeetMe visitors are from mobile phones' games and apps. What about people who sit on laptops or PCs? In short, although these two companies serve the same purpose as Facebook, Facebook plays in a far wider and much deeper field than these two, which can justify a larger price-to-book ratio.

Facebook's price can certainly go up, but that depends on the future business of the company. Remember, with one billion registered users and 845 million monthly active users, Facebook possesses a lot of potential for making big money.

Let's look at the fundamental aspects of Facebook

Facebook's steady rise to one billion members by October this year had already been appreciated well before it happened. Looking at the graph below, you can say that the one-billion mark was expected to be reached by August this year, if the growth line had followed the linear progression pattern.

(click to enlarge)

Now, the question is whether the growth rate will be sustained in the future or not. Many analysts think that it might not be possible for Facebook to keep on adding users at the present rate, while others think that it is far more crucial to focus on the conversion rate, rather than user acquisition rate.

If you are worried about the user growth rate, here's something you need to see.


Last six months

Country

% Change of User Nos.

United States

5.99%

India

21.19%

Brazil

21.38%

Indonesia

15.64%

Mexico

14.81%

Thailand

18.30%

Japan

41.02%

Vietnam

49.47%

South Korea

25.29%

Nigeria

28.77%

South Africa

25.50%

Ecuador

13.10%

Morocco

14.41%

Bangladesh

13.55%

While the craze about Facebook has mellowed in the United States, things are really picking up in eastern Asia and Africa. We must remember that China, with its 1.34 billion population, is still blocked from Facebook. Once it opens up, it can get really interesting for Mark Zuckerberg, who is already aiming at achieving the 2 billion users mark.

Another interesting thing to note is that the penetration rate is around or below 5% in India, Pakistan, Bangladesh, Nigeria, and many more countries, which says that there is still a lot more business potential yet to be achieved in these regions.

Now, the question is whether the company is able to convert the huge user list into money or not. Here's a graph that might interest you.

(click to enlarge)

Referring to the image above, it can be said that Mark Zuckerberg definitely knows what he is doing. It seems not only does he know how to increase the number of registered users, but also how to extract money from them. And with the current upward momentum in Africa and Asia, I don't think this is going to slow down soon.

Now, let's take a look at the comparative stats about the company.


Company

Metrics Used

 

Price-to-Book Ratio

Return on Average Assets

Operating Margin

Facebook

14.09

21.46%

47.32%

 

Renren Inc.

1

4.58%

-25.66%

 

MeetMe

1.31

-20.71%

-102.68%

 

LinkedIn

18.18

2.14%

4.95%

 

SINA Corp

2.79

-19.98%

-6.97%

 

Google (NASDAQ: GOOG)

3.93

14.93%

30.69%

 

It needs no clarification that Facebook does seem to be in a stronger position than most of the companies who do business in more or less the same niche.

About Zynga and Facebook Partnership Breakup

I am not worried about the severance of Facebook and Zynga's (NASDAQ: ZNGA) partnership. Although 12% of Facebook's 2011 annual income depended on Zynga, it is Facebook that brought Zynga into the business and yes, when 22-year olds spend a whole lot of time gaming on Facebook, that's not what Facebook is meant for. It's basically a social networking site and it will remain so, even without Zynga. Remember, if people just wanted to play games on Facebook, they could do so on any gaming.

Moreover, Facebook is already zooming in on the online gambling segment in the UK. As it is said in an article:

"Online gambling is a great opportunity for Facebook. The social giant currently offers thousands of games on its network. By offering gambling, it will take a certain percentage of revenue earned by British gambling companies. The revenue diversifies Facebook away from advertising and revenue from Zynga's popular games. Facebook will also be watching the Zynga request with the Nevada Board closely to decide if it should venture into the United States."

Remember, we are talking about a website (or company) that has seen:

  1. 1.13 trillion "likes"
  2. 140.3 billion friend connections
  3. 219 billion photos uploaded (265 billion in all if deleted photos are counted)
  4. 17 billion location check-ins
  5. 62.6 million songs played 22 billion times since September 2011" (as noted by Facebook)

Facebook is a company that has huge potential to grow, but then again, it operates in one of the most volatile sectors of the market. Let's just wait and watch a bit, shall we?


I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. Please consult your personal financial adviser before investing in the equity market.

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