Facebook Igniting On All Cylinders At 10-Year Mark

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Facebook ( FB ) had a lot to celebrate on the 10-year anniversary of its founding in a college dorm room by Mark Zuckerberg on Feb. 4.

The website was initially created to connect Harvard University students, was soon expanded to Yale and other colleges, then opened to the general public.

Facebook today is the world's largest social network, with more than 1.23 billion users.

"People often ask if I always knew that Facebook would become what it is today," wrote Zuckerberg, chairman and CEO, in a Facebook post on its anniversary. "No way."

While the plan of Zuckerberg was to connect school communities, he had a stronger passion to connect the world.

About 757 million users now log onto the website each day, up 22% from a year ago, Facebook said when it reported fourth-quarter financial results on Jan. 29.

Facebook stock gapped up 14% the following day to an all-time high, as it trounced Wall Street forecasts, spurred by mobile growth.

Daily usage on mobile devices rose 49% to 556 million. Its 1.23 billion members, up 16% from a year ago, account for half of all Internet users worldwide. But Zuckerberg is hardly content.

"Today, only one-third of the world's population has access to the Internet," he wrote in the anniversary post. "In the next decade, we have the opportunity and the responsibility to connect the other two-thirds."

Social Network Goes Public

The enormous success of and excitement around Facebook was evident with its initial public offering in May 2012. The IPO raised $16 billion as Facebook received a market capitalization of $104 billion, making it the biggest U.S. tech IPO of all time -- even though the first trading day ended nearly flat.

The fun didn't last, as worries surfaced that Facebook lacked an all-important mobile strategy.

Facebook stock began a long retreat from its IPO price of 38 a share, hitting a low of 17.55 four months later. Doubts about Facebook's fate lingered until it posted second-quarter earnings on July 24, 2013. That report showed Facebook making strong inroads on monetizing mobile, as earnings and revenue handily beat Wall Street estimates. Facebook stock rose 30% the next day and has continued an upward climb.

Its stock reached a new all-time high of 67.33 on Thursday, about 77% above its IPO price.

In its Q4 report, mobile revenue of $1.25 billion accounted for 53% of total sales, with mobile ad revenue up 309% from the same period a year ago and up 49% from Q3. Earnings rose 82% to 31 cents a share. Revenue rose 63% to $2.59 billion. That extended a streak of double or triple digit growth going back more than 18 quarters and was its sixth straight quarter of revenue acceleration.

"A lot of things came together to help out Facebook in the mobile field," said Wedge Partners analyst Martin Pyykkonen. "The success of smartphones fromApple ( AAPL ), Samsung and others made it much easier for people to access Facebook on mobile devices."

In a conference call with analysts after posting Q4 results, Zuckerberg said 2013 "was the year where we turned our business into a mobile business. I expect 2014 will be the year where we begin to develop new and engaging types of mobile experiences."

"Facebook has, so far, effectively addressed one of the most significant overhangs from its IPO days -- the lack of mobile monetization," wrote Mark Mahaney, analyst with RBC Capital Markets, in a recent report. "The most important Internet trend by far is mobile, and Facebook has become a mobile company."

Facebook took a big step toward advancing its mobile strategy in April 2012 when it paid $1 billion in cash and stock to acquire Instagram, a popular photo-sharing site for mobile devices, now with about 150 million users.

Facebook has carefully managed Instagram, letting it operate as a separate entity. Instagram only launched its first ads in Q4, as the company remains cautious about not disrupting the user experience.

Will Facebook Ads Click?

Facebook's primary focus is on improving the quality of ads, Zuckerberg said in the conference call; there's no rush to overly pump up ads on Instagram or Facebook.

In Q4, Facebook reported the number of ads delivered fell 8% from the year-ago period, but the average price per ad rose 92% in that time frame. Facebook wanted to place an emphasis on ad quality, rather than ad quantity.

"I think that the results over the last couple of quarters have really shown that by focusing on improving quality instead of just increasing quantity, we can drive pretty incredible business results," Zuckerberg said on the call.

Analysts expect Facebook to gradually increase ads on Instagram and see it as a major driver of new growth. Instagram, which isn't included in Facebook's mobile metrics, doubled its user base last year.

Another revenue growth driver for Facebook is video ads, which it is just now rolling out.

One thing Facebook did not address in the Q4 call was the matter of teens dropping off the site. Analysts have raised concerns that teen users are growing tired of the network and moving elsewhere.

Where Is Generation Y?

In its Q3 report, Facebook did acknowledge it has seen a decrease in daily use among younger teens. But Facebook declined to comment on it in the Q4 call.

"I think Facebook is getting a bum rap on the teen issue," said Shebly Seyrafi, analyst with FBN Securities.

"The argument is that if you lose teenagers, you've lost them forever," he said. "I think you will see them come back to Facebook as they get older. Many are migrating to Instagram for now, which Facebook owns."

Nomura analyst Anthony DiClemente, who initiated coverage on Facebook on Jan. 14 with a buy rating, raised his price target two weeks later after Facebook's Q4 report, to 70, from 65.

"The results from its fourth quarter reinforce our thesis that Facebook will continue to benefit from core tail winds, from higher ad pricing, Instagram monetization, international growth and higher engagement," DiClemente wrote.

Facebook is the second largest company by market cap in IBD's Internet-Content industry group, afterGoogle ( GOOG ) and far ahead ofBaidu ( BIDU ),Yahoo ( YHOO ),Twitter (TWTR) andLinkedIn (LNKD).



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: FB , AAPL , GOOG , BIDU , YHOO

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