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Facebook: Poised for Growth
Posted by: CMI Research (IP Logged)
Date: August 19, 2013 05:29PM

With over 1.15 billion monthly active users, Facebook Inc. (FB) is changing the way hundreds of millions of people relate to one another and share information. The rapidly growing company has revamped its business model to post higher revenue from mobile ads and has delivered a healthy second-quarter profit that reversed a loss from a year earlier. The results came when Google Inc. (GOOG) declared weaker-than-expected results, signaling that Facebook's aggressive push into the mobile advertising market has continued to pay off.

Clearly shown in the figure, advertising revenue has outperformed figures from the past.



Second Quarter 2013 Financial Highlights:

Facebook Inc. reported its financial results for the second quarter, which ended June 30, 2013.
  • Revenue: Revenue for the second quarter of 2013 increased of 53%.
  • Costs and expenses: GAAP costs and expenses for the second quarter of 2013 saw a decrease of 35% from the second quarter of 2012.
  • Operating margin: GAAP operating margin was 31% for the second quarter of 2013, compared to negative 63% in the second quarter of 2012.
Clearly, recent efforts have started to pay off. However, Facebook is not resting on its laurels as there are continued efforts to boost future earnings
  • Facebook plans to test a new payments product that would allow online shoppers to make purchases using their Facebook log-in information. It is expected to launch by September 2013.
  • On Aug.15, 2013, Facebook entered into a five-year senior unsecured revolving credit facility worth up to $6.5 billion with JPMorgan Chase Bank; this will ease any concerns of Facebook having secure liquidity for its day-to-day operations.
  • By the end of year 2013, Facebook plans to launch a video-ad service that will show members 15-second or less clips on both smartphones and the web. This is seen to have solid potential as a new revenue stream.
  • In an effort to compete more effectively with Twitter, Facebook is ramping up its efforts to get well-known people to post more content to its website
In addition to this, actions from competitors like Google have helped Facebook attract ad revenue from sources such as Yahoo and the New York Times. Specifically, updates to Gmail now automatically push "promotional" emails into a special folder which will reduce the effectiveness of email marketing, and thus marketing budgets are expected to shift to platforms such as Facebook.

Competition and Threats:
  • Facebook has a solid standing in the ad revenue market, second only to Google (Google's ad revenue earnings are three times as large as Facebook's).
  • Apple's (AAPL) iWallet has been edging closer to reality, preparing to take the system live nationally by mid-2014. Facebook wallet services will have hard time attracting loyal Apple users.
  • In the online payment space, Paypal has the major share. PayPal has been investing in mobile payments since 2006 and 10% of its $14 billion payment volume came from mobile devices last year. Some sources indicate that Facebook's payment system may be integrated into Paypal as a means to fill in billing information.
  • Security threats continue to be a major hurdle for Facebook, particularly for ventures such as an E-Wallet. Recently, in August 2013, the Palestinian Information System claims a man named Khalil had detected a bug which allows any Facebook user to post anything on the walls of other users [size=13px; ]— [/size]even when those users are not included in their list of friends. Warnings by Khalil were ignored by Facebook, that is, until Facebook CEO Mark Zuckerberg's account was hacked by Khalil. This has raised concern from already skeptical users about integrating their bank or credit card credentials into Facebook's e-wallet venture.
Analyst Recommendations:

On Friday, Aug. 16, 2013, Topeka raised Facebook's price target to $47 from $40. Also in early August 2013, Munster increased their price target to $46 from $38 after evaluating that, if Facebook obtains 5% of its ad revenue from online video ads, Facebook's online video ad revenue will surpass analysts' 2014 estimate of $330 million.

Morgan Stanley in their early August 2013 report argues Facebook's expected launch of video ad units will boost total revenue and earnings by 10% to 15% within one to two years.


[size=13px; ]Revenue estimates from analysts, as collected by Yahoo Finance, have estimated growth of 3.15% for the third quarter, and whopping 15% growth in the fourth quarter.[/size]

Conclusion:

With a P/E ratio as high as 54.75, Facebook Inc. looks expensive when compared to industry P/E ratio of 8.62. But decisive strategies and estimates for future seem promising to long-term investors.

Specifically, Facebook's initiatives to step into the lucrative market of online video ads looks promising. In addition, ad agencies have started to shift from email marketing to platforms such as Facebook as a digital advertising vertical. Facebook might be expensive now and while it's certainly not without its risk, I believe that this is the start of a long positive run.


Stocks Discussed: FB, GOOG, AAPL,
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