How Can Facebook Stay on Top?

Jacob Harper |

On Jan. 29 Facebook Inc. (FB) released their fourth quarter 2013 earnings report, and the company continued their year-long run of beating analyst estimates, reasserting their position as the undisputed kings of social networking. In turn, the company’s stock popped, adding $20 billion in value in just one trading day.

What FB Investors Liked

As opposed to last quarter, there was no caveat from an executive about young users fleeing the site to temper the hard data, and instead more reassuring news in the form of an exceptionally high percentage of revenues coming from mobile ads (52 percent).

Of course, this stands in stark contrast to the comparable quarter in 2012 when that percentage was zero. As internet access increasingly moves to smartphones, social media companies absolutely must derive the majority of their revenue via mobile, and Facebook is doing exactly that.

As the mega-cap surges a whopping 16 percent in a single trading day, Facebook now sports a valuation north of $150 billion, or more than the GDP of New Zealand. As evidenced by the day’s market movement, Facebook is performing like a growth stock. But how can a company as large as Facebook has become maintain that kind of momentum?

Playing the Social Media Playbook, and Then Some

Facebook has rectified the problems they had following their disastrous 2012 IPO by doing what every social media company must to stay relevant. The company has capitalized on mobile. They have made strides to keep users on the site longer. And while it might seem unthinkable, they’ve been able to grow the user base, racking up an astronomical 1.23 billion monthly users.

They’re going a step further as well, introducing new products and services, notably “Paper,” a targeted and human-curated news app divided into categories like LOL, Pop Culture, and Tech. This move keeps Facebook users from clicking on links to other news sites while planting users on the site even longer.

These tactics keep the revenue streaming in, but the factors potentially hindering company's ability to produce 16 percent single-day pops, or another year that sees 120 percent gains, seem more and more daunting, especially when facing the onslaught of emerging social media companies in the US and abroad.

FB's Next Step: Acquisitions

To continue their bull run while getting larger and larger, Facebook is going to have to expand their empire. Apps like Paper are a recognition that Facebook needs to broaden its scope and diversify its revenue stream, and, while growth similar to what the company has experienced in the last six months is likely unrepeatable, a slew of acquisitions could help spur Facebook on in 2014 and beyond.

Rival Twitter (TWTR) has obviously risen too far, too fast, experiencing a sizable price check in mid January. But Twitter is still well-diversified and growing quickly. Facebook is roughly four times bigger than Twitter, but that gap has shortened considerably since the latter had its highly successful IPO in November, with Twitter raking in highly impressive revenue growth while encroaching on Facebook’s territory. After all, every minute a user spends on Twitter or a Twitter service like Vine is a minute they’re not using Facebook.

Facebook’s purchase of photo service Instagram for $1 billion in 2012 was a very, very smart move. Now that Facebook has the cash (free cash flow of $2.85 billion in 2013), they can look to continue expanding into other platforms and diversify, a necessity for social networking outfits.

FB: A Social Media Juggernaut?

If the short history of social media has proven anything, it’s that nobody stays on top for long. But with another stock pop, and thus billions more in capital, Facebook has the clout to absorb, or frankly crush, nascent competitors. Twitter might be too big at this point (although Facebook did try to buy them at one point.) But if Facebook is to maintain growth-stock like momentum, they have to start getting aggressive.

On January 30 shares of Facebook had risen 15.45 percent by midday trading to hit an all-time high of $61.81 a share. Since July 2013 the company has more than doubled in value.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
FB Facebook Inc. 115.40 0.30 0.26 25,070,364
TWTR Twitter Inc. 17.93 -0.10 -0.55 12,208,682
FRIVF Fortune Re Invst Tr Units 1.20 0.00 0.00 0

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