Inside Wall Street: Facebook is a must-buy stock
The largest social media company will only get bigger as it pursues its growth strategy.
At Facebook's current price and valuation, the planet's largest social media enterprise and one of the world's biggest internet companies, is considerably undervalued. The stock has fallen off its high of $45 a share last year right after it went public at $38 on May 18, 2012. The stock shocked everyone when it spiraled down to as low as $17.50 just a few days after the IPO.
Having partly recovered and now to $29, some Street analysts who remain bullish put their 12-month price target on the stock between $32 and $37 a share. But some investors who have long-term time horizons and are more willing to take aggressive risks have higher targets of as much as a double the current share price in 12 to 18 months. And some strategists at several large institutional investors more attuned to the magnitude of the potential of social-media have their hearts on Facebook as a $100 stock.
"If you look at the experience and expanding valuations of such companies as Google (GOOG), Apple (AAPL), Amazon.com (AMZN) and eBay (EBAY), Facebook's potential as a pioneer and global name in social media cannot be overstated.
True, Facebook remains one of the most controversial stocks -- if not the most debated among the bulls and the bears. But probably the most appropriate appraisal of the stock is that it is the quintessential long-term stock story. For the year, analysts have been reining in, if not scaling back, their revenue and earnings projections. One of the bears' earlier complaints was that Facebook had no strategy on how to cash in on the mobile market.
Wrong! In the fourth quarter, Facebook reported that 23% of its advertising revenue, or $306 million, was from mobile ads. "It is important to note that Facebook is now on a $1 billion-plus mobile run-ads, up from essentially zero six to seven years ago, and its mobile revenues doubled sequentially," says Ralph Schackart, analyst at investment firm William Blair.
Facebook's ad revenues during the quarter jumped 41% year-over-year, to $1.32 billion, beating consensus Wall Street forecast of $1.28 billion. Its earnings also impressed, with its operating margin leaping 46.4%, exceeding the Street's expectation of 43.6%. However, Facebook is being criticized for its projected increase of its operating expenditures by 50% for 2013 due to increased hiring and aggressive investments. That will, of course, cut into operating margins. But let's not forget that for any company to grow, it needs to put more money in personnel and investments.
That has compelled analysts to scale back their earnings estimates for 2013, but they make up for it by increasing their estimates for 2014. Even Facebook-watchers who aren't totally bullish on the stock believe Facebook dominates in its chosen field. "We think Facebook has considerable competitive advantages in social media, due to its global brand, substantial user base, high levels of engagement, and considerable access to user data and information," says Scott Kessler, analyst at S&P Capital IQ, who rates the stock as a hold.
Wall Street insists on a "show me" attitude when it comes to Facebook, mainly because of the IPO fiasco that burned early investors. One thing is sure, however: Facebook, with its more than 1 billion active users who already had shared 240 billion pictures and more than 1 trillion connections, will just continue to grow sales and earnings and expand even more the number of its active users.
The bulls expect several new products to drive Facebook's future revenue and earnings growth. "We believe Facebook could generate $3 billion to $4 billion in targeted ad revenue by 2015," says Michael Pachter, analyst at Wedbush Securities, who rates the stock as "outperform." Targeted ad initiatives, he notes, include several changes in Facebook Offers and Promoted Posts, Custom Audiences, Facebook Exchange, and the Mobile Ad network. The changes are aimed at focusing more on advertisers and making offers more relevant to the audience.
Facebook is also "fine-tuning its graph search and, over the longer-term innovate ways of monetizing its use," says Pachter. He also notes that about 65% of Facebook's advertisers are now comfortable advertising on the mobile platform due primarily to the company's enhanced data tracking abilities. For example, Facebook's data suggest that mobile advertising results in higher click-through rates and a lower cost of conversion than right-hand column advertising, notes the analyst.
Here are some more positives that Pachter sees for Facebook: It will see better-than-expected operating margins despite management's focus on investing in the business; Facebook continues to be one of the world's most popular websites; it continues to be well-positioned to capture additional advertising market share; and it has the potential to add more new revenue streams.
For 2013, the analyst forecasts earnings of 58 cents a share on projected revenue of $6.81 billion, up from 2012's 50 cents a share on revenues of $5.08 billion, and 2011's 43 cents a share on $3.71 billion.
In sum, opportunity knocks as far as participating in the expanding world of social media -- and the attractive vehicle right now is Facebook.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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