Should You Buy Facebook?

“The Facebook IPO will be a dud.”

Stock of the WeekHad you said the words a few months before Facebook‘s (NASDAQ:FB) much-anticipated initial public offering in May 2012, you might have gotten a few dirty looks or laughs. While it was easy to see the company would have some issues coming public, the disaster that actually followed — its first-day glitch, the Morgan Stanley (NYSE:MS) fiasco, its four-month halving, its current -30% return — was the last thing anyone expected.

The impact was big — far bigger than Facebook. As I mentioned in a recent article, it all but killed off any hunger for social offerings, and the size of IPOs just hasn’t been the same.

Even the biggest disaster can present an opportunity, though. The question is, is Facebook — soon to be a full year removed from its folly-filled jump into the public markets — one of those opportunities?

Why It Might Be

Founder and CEO Mark Zuckerberg has certainly made lots of progress since Facebook’s IPO.

For one, he has refocused his 4,900-plus employees on the mobile market, which is crucial to Facebook’s success. The good news is that the efforts have gotten results — in the latest quarter, the monthly active mobile users reached 751 million, up from 543 million in the same period a year ago. Mobile-only active users came to 189 million.

Instagram, FB’s once-criticized acquisition, also has to grow at a breakneck rate. The site had 22 MMAUs when Facebook bought it in April 2012, but that number has since grown to 100 million — a faster growth rate than Facebook’s when it was at a similar size.

A key has been Zuckerberg’s dumping of web-based mobile technology HTML5. While the system made it easier to write for many devices, it lagged greatly in performance. Instead, Zuckerberg has focused the company on building apps in their native form (using a device’s core language).

More importantly, Zuckerberg has been aggressive with monetization, also producing promising results — Q1 mobile revenues of $375 million or 30% of total sales, up from 23% in the prior quarter.

A big part of that growth has come from paid app install ads. Facebook essentially is becoming another way — a la Apple‘s (NASDAQ:AAPL) App Store and Google (NASDAQ:GOOG) Play — to get people to download apps. Keep in mind that 81 of the top 100 paid apps on iOS and 70 of the top 100 Android apps are integrated with the social network.

Why It Might Not Be

The problem is that the rest of Facebook’s businesses have been lackluster.

For example, the Payments category — which includes mostly games — generated revenues of $213 million in Q1, which was up only 11% over the past year amid difficulties by major partners like Zynga (NASDAQ:ZNGA) in creating engaging games.

And remember all the hoopla about Graph Search or Gifts? Facebook has provided few details on these programs, indicating they’re still in the nascent stages.

Even Facebook’s latest mobile apps have been embarrassments. Poke — a Snapchat knock-off — quickly evaporated. Facebook Home — something of a homepage for Android — has had a difficult time with adoption in part because it eliminates popular Android widgets and docks.


Going forward, it’s probably a good bet that Facebook will continue to get strong from its core mobile business, with ads and app installs. But it looks like this is the only driver — and that already seems to be more than baked into the stock’s valuation. Shares currently trade at a hefty forward price-to-earnings ratio of 36, compared to 17 for Google and 10 for Apple.

Expect Facebook to stay in neutral for awhile, if not trail off significantly should the company show weakness in its growth rate.

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.3

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