If you're like millions of investors, you've decided
Facebook (Nasdaq: FB)
The company's hotly-anticipatedIPO in the spring of 2012 was a
bust, and over subsequentquarters ,shares have been adrift at
sea. Indeed, as the S&P 500 has tacked on additional
robustgains thisyear , shares of Facebook have quietly sunk below
the 100-daymoving average .
Of course, like many other investors, you've tucked thisstock
away into the back of your mind, planning on giving it a fresh
look when the current phase of malaise has passed.
Well, the time has come to give this broken IPO a fresh look.
And when you do, you'll find abusiness model that is finally
ripening, with many arrows in its quiver. Facebook's 2013sales
andprofit trends may not seem overly impressive, but the seeds
are now in place for a much better 2014 and 2015.
Here are five key reasons why shares of Facebook should
finally hold great appeal.
A Global Freight Train
At first glance, Facebook would seem to be a purely
American phenomenon. The company's U.S user base of 207
million (as of May) is larger than its next four markets
combined (Brazil, Indonesia, Mexico and the U.K). Yet the
U.S.-centric nature of this business model is really a
matter of timing, as the social-media network was launched
here first and is only now showing solid growth in other
For example, two-thirds of all Americans now have a
Facebook account, according toinvestment firm Jefferies
& Co. Across Europe, that figure stands at 50% in
Europe, while in Japan and other key markets in Asia, that
figure is closer to 25%. Notably, Facebook's penetration is
rising at a faster rate outside the U.S. as the rest of the
world plays catch-up. Simply focusing on the 600 million
registered users in Facebook's 10 largest markets gives you
a sense of the size of this company's captive audience.
Those 10 markets account for half of the company's total
The biggest concern around Facebook's IPO was an unproven
ability to profit from that customer base. Management has
been pilloried for moving slowly on that front, preferring
to "build the base" before profiting from it.
Yet thanks to sharp rises in ad placements,revenue is
finally starting to take off. Look for 30% revenue growth
this year (to above $6.5 billion) and 25% annualized growth
in coming years, setting the stage for $10 billion in
revenue by 2015.
Aggressively Pursuing New Platforms
Investors may mistakenly think that Facebook is losing its
grip on the young consumer. Even if that's the case,
management is adeptly building (or buying) complementary
user platforms to retain consumer interest. For example,
the $1 billion purchase of Instagram in April 2012 now
looks like a masterstroke, as some Facebook users now
simply spend more time on Instagram instead. In the quarter
that ended in March, the number of global Facebook users
rose 5% sequentially, compared with a 25% increase in
In addition to Instagram, "Facebook has rolled out a series
of mobile apps fundamentally niche mini-social networks)
over the past 12 months," notedanalysts at BMOCapital
Markets . "These include the Messenger, Camera, and Poke
apps. We see these offerings not as an attempt to create
the next blockbuster platform, but rather as specialized
offerings for users focused on particular activities as
opposed to the 'social utility' that is offered by
Facebook." BMO 's analysts raised theirrating on the stock
to "outperform" from "market perform " in late May, with a
$33price target .
Other growth initiatives include:
- Custom Audiences: Allows marketers to reach target
audiences based on their own custom databases, whether a
list of client email addresses, phone numbers or Facebook
- Partner Categories: Enables marketers toleverage
third-party data to deliver targeted ads.
- Facebook Exchange (FBX): Provides for
real-time-bidding for coveted ad slots.
- Facebook Offers: This has a chance to exceed
Groupon's deals platform, thanks to Facebook's massive
- Facebook gifts:Will allow users to send gifts for
birthdays, anniversaries and other events.
Google (Nasdaq: GOOG)
will tell you, not all of these initiatives will succeed,
but those that do should help sustain solid long-term
- Premium Services: This has been briefly mentioned by
management with few details thus far.
A Premier Player In Mobile Video
Sometime in the current quarter, look for Facebook to start
serving video ads on its core site and on Instagram. And
look for that effort to have a huge effect on theincome
statement , as ad rates are far higher than static
Facebook is expected to take a "Super Bowl commercial"
approach, selling coveted 24-hour slots, with hundreds of
thousands of ads served, for a price between $1 million and
$4 million. Details remain a bit sketchy, but when the
service is rolled out, look for solid revenue forecasts
For instance, analysts at Jefferies predict "video ads
could be Facebook's next billion-dollar business." That
outlook was a key reason why Jefferies upgraded shares from
"hold" to "buy" in late May with a $32 price target.
Not As Expensive As You Think
Until now, Facebook has been seen as a "story stock"
without a robust income statement to drive valuations. That
is anissue that dogged
Amazon.com (Nasdaq: AMZN)
, Google and others as they patiently built out their
Yet Facebook's operating metrics are extremely strong.
Margins onEBITDA (earnings before interest,taxes
,depreciation andamortization ) exceeded 55% in each of the
past five quarters and should stay above 50% for the
foreseeable future, even as the company heavily invests in
headcount for new growth initiatives.
Equally important, shares trade for around 12 times
consensus 2014 EBITDA, on anenterprise value basis
(according toFactSet Research). Facebook's EBITDA is
expected to grow at a 24% annual pace through 2016,
according to Merrill Lynch, faster than most of its rivals
Also,free cash flow was a bit disappointing in 2012 at just
$379 million. However, free cash flow is expected to hit $2
billion by next year and approach $3 billion by 2015,
according to consensus forecasts. For comparison, Google
didn't reach $3 billion in free cash flow until 2010 -- six
years after its IPO.
Risks to Consider:
Facebook is enteringprime time interms of monetizing its user
base, and any problems on that front will push shares to fresh
Action to Take -->
Thanks to the imminent launch of video ads, shares of Facebook
may be reaching an inflection point. Though second-quarter
results (which are due July 23) are unlikely to surprise on
theupside , management's forward view should be quitebullish ,
leading many investors to give this moribund stock a fresh
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