Should I Buy FB Stock? 3 Pros, 3 Cons

At all-time high prices, Facebook looks plenty frothy

Should I Buy FB Stock? 3 Pros, 3 Cons

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.

Facebook185 Should I Buy FB Stock? 3 Pros, 3 Cons“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 Internet.org. 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.

The MySpace Syndrome: The key reason for the downfall of MySpace was the flood of annoying ads, which weighed heavily on the user experience. That gave Facebook an edge. However, FB might be doing the same thing that did in MySpace. It’s clear that, as Facebook ramps up monetization, the ads are starting to pile up, and that could be giving a leg up to the likes of SnapChat, WhatsApp and Line. Meanwhile, studies are increasingly showing that the demographics trend isn’t looking good for Facebook on the young end. Could that be an early indicator of its future decline?

Flubs: Facebook has had a dry spell with new products. Offerings like Home for Android and Graph Search have failed to get much interest from interest. Poke, a knock-off of SnapChat, was a total flop. When it comes to product development, Facebook seems to be more focused on reacting to the competition, such as when Facebook introduced features such as trending topics and hashtags in response to Twitter. Long-term, Facebook must be more creative and launch breakout products, or it risks being vulnerable to the erosion of its user base.

Verdict

Zuckerberg has clearly shown that he is a standout leader capable of at least identifying the need for a middle ground of solid product and monetization.

Facebook also is at the center of a massive shift where ad dollars are moving from traditional sources to online platforms. The company has much latent potential with properties like Instagram, which have minimal ads, and FB stock also could get a boost from a mobile ad network and auto-play video ads.

Still, Wall Street appears well ahead of this. FB stock currently trades at 38 times next year’s earnings, which is well ahead of other tech giants such as Google. In other words, growth is plenty expected … and if it doesn’t keep coming, watch out.

So should you buy FB stock? No — for now, much of the growth has already been factored into the stock. If you do plan on buying in, wait for a quick pullback.

More on Facebook’s 10th Birthday

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/02/buy-fb-stock-facebook-birthday/.

©2014 InvestorPlace Media, LLC

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