Facebook: The Bull Case and the Bear Case

By Vinayak on Monday, September 9, 2013 with 0 comments

Analysts have adjusted upward the revenue and EPS growth of Facebook (NASDAQ: FB) after the Q2 earnings beat. How should we interpret this? Will The Social Network conquer all?
Analysts are always going to be shifting their estimates and opinions based on various developments. Let's look at the bull and bear case for FB.

The Bull Case

Facebook has a lot of room to grow and it has the potential to be the first Trillion dollar cap company. Here is why:
1) They are on a path to grab TV advertising money which is the biggest ad market out there.

2) They have socially relevant and contextual content which arguably have a lot of value than what 'traditional' search engines currently index. Meaning, the FB search will be a lot more relevant in coming years. As a result, the targeted ads will be worth a lot more than any other ad targeting system in the world.

3 There is lots of new content generated on Facebook, Twitter and Instagram. Whereas, competitors like Google have only Youtube that can compete on a somewhat similar level.

4) Facebook has a mobile monetization plan that is growing faster than the one that Google has. Mobile ads are great, search for a restaurant, get an ad with a coupon for a local restaurant.

Investors seem to like Facebook's team and think they can execute well without many hiccups. It sure appears as though the $40ish stock price is not a bad price to pay for FB, despite the real possibility of a pullback.

Long-term investors recognize the vast opportunity and see the current share price as a bargain. Investors are in general riding on what FB COULD be.

The Bear Case
The current rich valuation appears to be main issue as a public company trading at around 14 times sales is really cannot afford ANY hiccups. A recent case in point is when the stock dropped after the initial pop immediately after its fairly weak Q1 results.

Anyway, let's see why investors are bearish on FB.

1. There is content everywhere. And it could be argued that Google fares better than Facebook in pointing users to much more valuable content.

2. Facebook's revenue is 1/7th of Google's, and so bearish analysts will make the case that it is indeed easier to grow from a smaller start point.

But let's not detract from the fact that the Social Network is a wonderful company and a once-in-a-lifetime growth story. At the same time, for Facebook to trade at 4 times the year's sales, the social media giant would have to grow sales by more than three fold. This could take several years.
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Category: Stocks



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