Facebook (FB), Still A Good Buy At These Levels?

By: ispeculatornew
Date posted: 05.02.2013 (3:00 am) | Write a Comment  (2 Comments)

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As most of you know, I do have a fairly significant position in Facebook, as one of my longer term speculative picks. I’m up 35% or so on the trade but the goal was obviously to do a lot better. That being said, with Facebook announcing its quarterly earnings yesterday after the close, it’s a good time for me to revisit my trade. Even more interesting is the fact that after an hour of trading following the earnings release (after-hours trading), the stock is pretty much at the same level. If you remember, the main thesis for owning Facebook was:

Facebook is the dominant social network and while it could turn into the latest MySpace, I didn’t believe it would happen.. it’s more of a Google story (before Google, search engines had also failed one by one)
Facebook would be able to develop completely different sources of revenues so growth would not depend on user growth but on growth of revenues/user
I felt like the idea that users were increasingly access Facebook by mobile was very positive (despite many saying it was a real danger)

Now, nearly one year later, here are how things have evolved in the last quarter, compared to the same period last year:

sales increased 38% versus Q1 2012 to $1.46B
share of mobile revenues increased to 30% (compared to 23% in the previous quarter)
Net income increased 58% versus Q1 2012 to $217M
Earnings per share increased to $0.12, from $0.09 a year ago
Facebook now attracts 13% of mobile ad dollars in the US
Facebook monthly active users now reach 1.11 billion, a 23% increase versus Q1 2012

1Q2013MAU

The consensus estimate is for Facebook to earn $0.57 per share in 2013, a P/E of 48.

likePositives

-In the past year, Facebook has continued to move fast and be efficient.. among others it:

Acquired Instagram, which is arguably the 2nd most active social network
Rolled out new apps and a revamped newsfeed
Rolled out a mobile operating system, “Home”

-Another very positive sign is that while the % of users has increased, the % of increase revenues was higher and % increase in profits was the higher. That is certainly a sign that Facebook has a lot of growth left and does not depend on reaching a billion more users to double its business.

Questions about Mark Zuckerberg’s ability to lead and role as CEO of Facebook are basically behind him. He’s in it for the long run and is now paying himself a $1/year salary. He’s in it because he believes in the Facebook vision

Still a lot of untapped potential. Facebook has not started making money from its Social Graph, from Instagram (and its 100 million users), etc.

FB

dislikeNegatives

-That being said, I’d still like to see Facebook increase that through new products, rather than increasing the number of ads. Yes, a transition to ads in the news feed (rather than in the sidebars) made a ton of sense but there needs to be a more innovative approach.

-While I think the initiative is a good idea, I’m not convinced that Facebook Home will be enough to make a big difference in the mobile space.

In The End…

I do still think there is a lot of untapped potential and that while Facebook’s P/E does remain high, it’s not at ridiculous levels given the current growth levels the company has been able to maintain. I do still expect Facebook to go much higher in the next 3-5 years…. time will tell I guess!

What are your thoughts on Facebook’s stock?

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2 Comments

  1. Comment by Robert Zaleski — May 2, 2013 @ 4:16 am

    I think buying FB in the 24-27 range is good. A Forward PE of 35 for a growth stock isn’t really all that high. If it doubles in earnings in 2-3 years PE is only 17 which isn’t bad either. I wouldn’t worry unless it spends 2-3 days moving below 24.75 (lower 2 or 3 days in a row, especially closing towards the bottom of the day’s range) and gets down around 24. You might sell at the wrong time, but getting out with 10% on a falling stock and buying it back later if you are wrong is better than ending up loosing 10%.

    So if you like the business, which it sounds like you mostly do. I’d hold it for awhile. You could even add in the 25-25.50 range. Just make sure you can sleep the week before earnings on it 🙂 Sell half if you can’t!!

  2. Comment by IS — May 2, 2013 @ 6:31 am

    @Robert- Thanks a lot for the feedback. I don’t think I’d add to it right now because I do put a decent amount into such trades from the start… and yes, sleeping very well because I’m in it for the long term. In fact, a major fail in earnings (depending on the reason why) is perhaps the only way I’d add to my position!

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