Facebook: A Lot to Like

10/11/2013 8:00 am EST


Glenn Rogers

Contributing Editor, Internet Wealth Builder and The Income Investor

Our latest recommendation is for the social networking giant that investors love to hate; after its IPO, it dropped like a rock and was left for dead by the investment community, observes Glenn Rogers in Internet Wealth Builder.

Facebook (FB) went public at $38 a share on May 18, 2012 and it didn't take long for the naysayers to look brilliant. The stock went into a four-month swoon that culminated in early September when the shares fell below $18. The "I told you so" crowd had a field day.

But then a strange thing happened. The stock flattened out, traded in the $20 range until November, then shot up to the $25-$30 range, where it meandered around until late July of this year. Since then, it has been on fire, breaking through $50 last week. The pessimists have long since run for the hills.

So what happened? Let's run through a few of the key statistics on the company to remind you just how big this business has become.

By now many of you will have seen the movie The Social Network that told the story of how the company was started in a dorm at Harvard and morphed into one of the largest Internet businesses in history.

From the humble beginnings, the company has grown into a business with a global footprint that employs 5,000 people. Facebook has over 800 million active users on its mobile platform with 699 million daily users. That works out to over 1.5 billion monthly users (as of June 13). That's incredible when you stop to think about it.

I'm pretty sure I don't need to explain what Facebook is, or does, since most of you probably use it. Very few companies have been able to manage this type of scale in such a short period of time, and although it has had some hiccups along the way, for the most part, this is a stunningly successful enterprise.

In addition to continually updating its platform, the company has made a number of acquisitions dating back to 2005. The most important of those was Instagram, for which the company paid $1 billion in 2012.

At the time, many analysts thought the cost was too high, but some young people migrated away from Facebook and went to Instagram, so FB was able to continue to hold and grow its audience. As a result, Instagram has proven to be a bargain.

In all, Facebook has acquired 39 companies. That would be impressive even without the growth of their core business. Some of these companies were purchased for the human talent they offered, others because they had unique technology offerings. But whatever the motivation, it's been a very aggressive acquisition program.

The biggest knock against the company at the time of the IPO was that it hadn't been able to prove that it could monetize its mobile offerings. However, recent financial results indicate that management has figured that out.

According to the second-quarter report, 41% of advertising revenue came from mobile. Total revenue for the quarter totaled $1.8 billion, which was an increase of 53% over the second quarter of 2012.

The company showed a profit of $333 million ($0.13 a share) in the quarter (GAAP standard). That may not seem like much, but it's a big improvement over a loss of $157 million ($0.08 a share) in the same period last year.

Traffic continued to grow as well, which is amazing given the assumption that there was hardly anyone left to join Facebook. But active users increased 27% year-over-year, monthly users were up 21%, and mobile increased by 51%. In fact, Facebook on mobile phones surpassed 100 million monthly active users in just two years.

Facebook is now well past its initial IPO price, and it seems to me, this could be another of those momentum stocks that continues to outperform the market for the next couple of years.

Like Facebook, most of the high-flying Internet stocks have had great runs recently. But I think that a number of growth funds, which have underperformed the market, will be looking for momentum stocks to try and gain some ground, and Facebook will be one of the companies that will benefit.

Personally, I did not participate in the IPO, but I have been in and out of the stock since it fell into the low $20s. Now I view it as a core holding and this could be a stock that ultimately just keeps going, even if the valuation looks scary from time to time. Buy with a target of $60.

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