Is Facebook the Top Technology Pick Now?

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

The last few months have not been good for technology companies that rely on advertisement revenues. The recent economic uncertainty due to the fiscal cliff has been one of the main reasons advertisers have been cautious and advertisement budgets have shrunk. This has adversely affected companies such as Google, Pandora, Facebook (NASDAQ: FB), Zynga, etc., which rely on Internet and mobile advertisements for their revenues.

Facebook is one of the biggest and most discussed technology stocks on the market. This technology giant drives a large part of its total revenues from advertisements. Although it’s new on the listed block and it never really ‘failed’ to have made a comeback, the poor valuations and IPO criticism that Facebook faced almost makes one believe the company has made a comeback. The recent improved performance of the stock is primarily due to its impressive mobile monetization and exceptional lockup expiration management. I believe Facebook is one of the best technology bets and has far better valuations than either Sina (NASDAQ: SINA)or Baidu (NASDAQ: BIDU)

Expectations

The tech giant has released its 4Q earnings. The market was expecting Facebook to report sales of $1.5 billion and EBITA of $853 million, and was also expecting the social giant to report an EPS of $0.15. The company has met or exceeded these expectations in the last two quarters, as the table below shows.

Earnings History

Jun 12

Sep 12

EPS Est

0.12

0.11

EPS Actual

0.12

0.12

Difference

0.00

0.01

Surprise %

0.00%

9.10%

Source: Yahoo! Finance

The following were the key issues before the earnings announcement:

i)   The Facebook Exchange has garnered strong consumer interest, but it remains to be seen how much of that has been translated into commercial success.

ii) The most important aspect from the earnings announcement would be once again the growth from mobile. Last quarter the company earned approximately 14% of its revenue from mobile, and investors expect this figure to substantially improve.

Results

The Internet giant reported revenues of $1.59 billion, EBITDA of $902 million, and an EPS of $0.17, beating the Street hands down. Although it is a modest beat, it says a lot about the ability of Facebook to maintain sales in a tough quarter that has been plagued by fiscal cliff anxiety.

Key takeaways

As I have mentioned above the market was worried about mobile monetization and the performance of Facebook Exchange. There was more than impressive growth in mobile monetization, as it increased to 23% of total revenues. The overall advertisement revenues were flat for the quarter, as the growth in mobile was offset by a 9% decline in desktop revenues. Moreover as per my macroeconomic concerns there was a 4% decline in ad pricing according to sell side estimates. This was mostly due to a weak advertisement market and should impact other major players that drive advertisement revenues from the European and North American businesses. However, I believe this is a short term concern and expect pricing to stabilize in the first half of 2013. The company has also announced massive investments in R&D in a bid to keep diversifying revenues away from advertisement.

Industry Implications

These results hold great significance for other major technology companies that are dependent on advertisement revenues. I believe at this stage the US advertisement industry is a risky business, despite my bullish outlook on advertisement pricing. This high risk increases the attractiveness of stocks such as Baidu and Sina, which drive advertisement revenues from the Chinese market. This doesn’t mean these technology giants are without their risks--there are rumors that Chinese companies can be expelled from the US markets due to their shady accounting practices. Despite these concerns both stock are trading at cheap valuations, and the successful mobile monetization trends displayed by Facebook makes them an interesting option. 

However, as the table below shows, Facebook is still the best social media play even if we count Chinese companies. The valuations of search engine giant Baidu are the most attractive of the lot and it’s a strong buy in its own right. The primary reason Baidu is so attractive is its extremely low PEG ratio, which indicates the growth potential available in the Chinese market. Sina has disappointed investors by lowering its fourth quarter guidance. Investors were expecting Sina to report revenues of $152 million for the fourth quarter, but the company expects revenues to be between $132-$136 million. In other news, Sina has reached an agreement with AutoNavi Holdings Limited to enchance and improve their social, location, and mobile (SoLoMo) offerings. 

Company

P/E

PEG

Facebook

35x

1.61x

Baidu

18x

0.66x

Sina

75x

26x

Source: Yahoo! Finance

Bottom line

I believe the 4% after-market drop is an aberration, and these earnings make Facebook one of the best long term technology options. The market will correct itself and Facebook will soar ever higher. The valuations above show that Facebook is the best social media bet in the market. 


SmartEquity has no position in any stocks mentioned. The Motley Fool recommends Baidu, Facebook, and SINA . The Motley Fool owns shares of Baidu and Facebook. 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!

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