On July 24 Facebook Inc. (FB) posted its second quarter 2013 earnings, indicating the company far exceeded analyst expectations in both earnings and revenue, and shot up 25 percent that day. The sock continued climbing, and on Aug. 2 surpassed $38 a share, finally climbing above its July 2012 IPO price.
On Sept. 4 Facebook was at $41.78 a share, not far under its all time high of $42.99. The company has been spurred by the company’s ability to quickly adapt to mobile, long seen as the key for the social media behemoth’s success. While this transition has indeed been successful not all analysts are on board the Facebook train, and the company still has its share of doubters.
To be sure, the company has its share of pros and cons:
Growth: Perhaps no company on the planet has grown quite like Facebook. After all, since Peter Thiel’s $500,000 angel investment in the company in summer of 2004, it has grown to be worth roughly $101.57 billion. No company on the planet can boast growth like that.
Of particular importance to their growth is Facebook's advertising revenue, which analysts are bullish on. Facebook recently passed 1 million total advertisers, indicating a diverse revenue base unlikely to simultaneously evaporate.
Mobile: One of main catalysts to Facebook’s renaissance has been its sly integration of advertising into its mobile experience. As more and more users access Facebook via their phones, the company had to figure out how to monetize the ubiquitous platform. In 2012 they reported zero dollars from mobile advertising, and analysts often cited this fact for a major reason the company stumbled so badly at their IPO.
But figure out mobile they did. In Q2 2013 the company boasted $1.6 billion in revenue from mobile advertising, or 41 percent of their total ad revenue take.
Advanced Search: Facebook’s de facto rival is Google Inc. (GOOG) , with Facebook dominating social media and Google search. While Google has attempted to edge in on Facebook with Google+ with middling amount of success, Facebook last month rolled out Graph Search, which shows promise at keeping users on longer.
Facebook is going to have a difficult time attracting new users, as their market saturation is getting to a point where there simply aren’t enough humans on the planet to support user growth. So the key then is getting people to stay on the site longer. Facebook Graph, by opening up its massive stores of user-generated data for other users to play with, certainly provides ample time to do just that. Think of it like a News Feed that never ends, and thus keeps users glued more often, and for longer.
Profit/Earnings Ratio: Among the most worrying aspects of Facebook’s stock is its profit to earnings ratio, which currently sits at 189. This is of great consternation to traditionally-minded investors, who like a company that is actually making actual money to justify their stock price.
This high P/E is tempered somewhat by analyst predictions that this rate will shrink significantly. In 2014 the P/E ratio is expected to go down to 59, and shrink down to 41 by 2015, putting it more or less in line with other tech companies. But their current level is certainly worrisome.
No Track Record: Remember Friendster? How about the dinosaur that refuses to die called MySpace? Social media is a notoriously fickle industry built on trends, and all it takes is one hot innovation to crash and burn Facebook.
While Facebook made a smart move buying Instagram for $1 billion in 2012, if Facebook thinks they can just snatch up every serious competitor, they should keep in mind its own history. In 2007 Microsoft Corporation (MSFT) offered CEO Mark Zuckerberg $15 billion for the company, which he wisely turned down.
While Instagram might not have been the next Facebook, there’s no track record to say how the company will adapt when they are seriously threatened by a viable social media company they can’t buy out.
Indications Facebook Has Peaked: Social media necessitates that young people continue to adopt it, and already trend analysts whisper that young people aren’t adopting Facebook like they were in its explosive growth heyday. Part of this is due to the site’s popularity, wherein inclusiveness has made the company’s virtual space crowded with everyone, and thus less attractive to teenagers seeking a place away from, say, their teachers and parents.
In its most established markets, the site is actually losing users. Facebook shed 6 million American users and an additional 4.5 million UK users in April 2013.
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