Facebook Will Have the Last Laugh

04/22/2013 7:45 am EST

Focus: STOCKS

Michael Brush

Columnist, MSN Money

Here are six myths that are keeping potential Facebook investors on the sidelines...expertly dispelled by Michael Brush of MSN Money.

A lot of investors avoid Facebook (FB) because of the bad reputation left by its bungled initial public offering.

It was priced way too high when it hit the market last May, amid excessive Wall Street hype and accompanying trading snafus. The dive from $38 a share to below $18 last fall cost traders lots of money.

More recently, Facebook has been dogged by a half-dozen persistent and outlandish myths. As reality sets in and these myths go away, investors will buy the stock of the world's most popular social Web site. That should push the stock up more than 35% over the next year, to about $35. It could send it up fourfold over the next several years.

JPMorgan Chase analyst Doug Anmuth predicts Facebook will turn into an "enduring, blue-chip company" as it continues to show investors it can convert its popularity into profits. Short term, he's got a $35 price target over the next 12 months.

Kevin Landis, portfolio manager of Firsthand Technology Value Fund (SVVC) thinks Facebook will grow to match Google (GOOG) in market value over the next several years, a move that would quadruple Facebook's stock price to $107.

Given how much people love to hate Facebook, these predictions might sound crazy. But not if you explode the six myths holding Facebook back. Let's blow 'em up one by one.

Myth No. 1: Facebook can't make the transition to mobile. The reason cited is because cell phone screens are so small it's tough to run ads there.

Fourth-quarter results blew this myth out of the water. Mobile ad revenue shot up to 23% of overall ad revenue, from zero at the start of the year. And it advanced an impressive 50% over the third quarter to hit $305 million out of $1.33 billion total ad revenue.

Myth No. 2: Facebook can't run enough ads to succeed without alienating users. Ads run in Facebook's "news feed," the main content area showing updates, feel too much like spam, say Facebook skeptics like Jon Burgstone, a managing director of Symbol Capital, who teaches engineering at the University of California, Berkeley. So they alienate Facebook users.

"Facebook still hasn't figured out advertising," says Burgstone.

One simple number blows this myth away: 41%. That's how much advertising revenue grew in the fourth quarter, to $1.33 billion. Rest assured that Facebook will keep figuring out ways to convert what it knows about you into marketing power for advertisers.

Myth No. 3: Reinvestment will keep Facebook profits low.This could be the biggest myth holding back Facebook stock right now, and it's probably the dumbest, too. I get that investors are highly focused on quarterly results—which get hit by long-term investment. But long-term investments pay off big time for patient investors.

Where is Facebook stock going long term? Morningstar thinks Facebook will generate $40 billion in annual revenue by 2021. Put Google's current 5.2 sales multiple on that and you get a $208 billion market cap for Facebook. Facebook stock advances 3.3 times to $84.

Firsthand Technology Value Fund thinks there's "no question" Facebook will match Google in market cap at some point, since they're in a similar businesses and Facebook is just as good at it. Google has a market cap of $264 billion; Facebook's market cap would have to advance 4.2 times to get there. This move would send Facebook stock well above $100.

Either way, owning Facebook will surely beat owning an S&P 500 index fund over that time frame.

Read the rest of the article, including the other three myths, at MSN Money...

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