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Should I Buy FB Stock? 3 Pros, 3 Cons

At all-time high prices, Facebook looks plenty frothy

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Facebook (FB) is celebrating its 10th birthday today, just days after putting out another solid earnings report that shot FB stock to a new high.

facebook-stock-fb-stock“It’s been an amazing journey so far, for me personally and for all of us at the company,” said CEO Mark Zuckerberg on the Facebook earnings call.

Of course, it was a difficult journey, too. He and Facebook had to fend off competitors like Friendster, MySpace and even Google (GOOG). He also had to make the transition from the desktop to mobile. But through it all, Zuckerberg has proven adaptable, brilliant and fierce.

The only question now is — can he and FB stock keep up their winning ways? We look at the pros and cons of the stock to find out.

FB Stock Pros

Massive Platform: About 1.23 billion people visit FB every month, with about 750 million of those visiting on a daily basis. Facebook in turn is able to collect huge troves of information about these users, which it translates into targeted marketing. FB stock has in turn benefited from strong pricing power for Facebook ads. Still, the real story for Facebook is mobile. By end the of 2013, mobile monthly active users came to a whopping 945 million (+39% on a year-over-year basis), and mobile daily active users had improved by 49% YOY to 556 million.

Beyond the News Feed: Facebook plans to build more apps that provide unique solutions for users without being embedded in the core Facebook app. One example is Messenger, which has been growing at breakneck speed — it was the most downloaded app for Apple’s (AAPL) iOS and Google’s Android in December. FB also is adding key assets via acquisitions, the most important of which (so far) appears to be Instagram. With it, Facebook has been able to benefit from the huge popularity of photo sharing and also has been able to better engage younger users.

Lastly, it appears Facebook is building a mobile ad network that would give FB a piece of mobile ads from third-party apps — a potentially large revenue opportunity. Facebook already has the components to make this happen, such a software development kit for mobile apps (via its Parse division), critical ad targeting technology (such as with a desktop-based ad network) and Facebook logins for third-party apps.

Monetization: FB stock couldn’t take off until Facebook figured out how to make money off of its users. And Zuckerberg has figured it out — especially in mobile. In the latest quarter, about 53% of ad revenues came from mobile sources, totaling about $1.25 billion. But unlike many other hot Internet operators, such as Twitter (TWTR), FB has been able to remain profitable. Also, 2013 free cash flow was $2.8 billion and Facebook has $11.4 billion in short-term investments.

A key to Facebook’s monetization success has been the company’s aggressive investments in ad technologies. For example, by leveraging third-party data sources — such as from Datalogix, Acxiom (ACXM) and Alliance Data Systems (ADS) — it has been able to provide analytics on the performance of ad campaigns. On the Q4 earnings call, Facebook COO Sheryl Sandberg said the average return on News Feed ads was an incredible 8x.

FB Stock Cons

Limits: About a third of the world’s population has access to the Internet, and many of those who are connected only have low-bandwidth connections. Ergo, it’ll be tough for FB to maintain the hefty ramp in its user growth. Facebook is trying to address the problem with the launch of The site’s mission is to create partnerships with Internet service providers and telecom carriers to build the infrastructure necessary to make Internet access (and thus Facebook use) more ubiquitous. However, so far, the details are vague, and it’s too early to measure any serious traction.

Article printed from InvestorPlace Media,

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