A little History Lesson
If you asked most investors before Facebook's (FB) IPO if buying Facebook for upwards of $40 per share was a smart play, you would have been laughed out of town. Advocates for Facebook merely sputtered facts and shoved profit quotes down the throats of any in opposition. I was on the fence for the largest internet IPO of all time. I couldn't make up my mind about whether to buy for profit or attempt to short. Public opinion on this stock was so mixed it was impossible to make a decision. On one hand, here is a product that my friends, family, and anyone in between use on a daily basis. On the other hand, here is a social media site whose main audience is young kids goofing around.
The outcome of Facebook's IPO was unpredictable. Factors including the high IPO price, Public uncertainty, NASDAQ's computer malfunction, and conspiracies around Morgan Stanley issuing too many shares all led to the largest internet IPO flop.
Even without any computer malfunctions and conspiracies regarding Morgan Stanley, this stock would of most likely still crashed. The main reason being that the majority of the public didn't understand how Facebook made money, and why it was valued at $38 a share with a $104 billion dollar valuation.
These questions still today go unanswered. Just months before the IPO Facebook was considering a stock price of between $28-35, which would have obviously been a better bet. Yet it seems the greed of underwriters and big banks such as Morgan Stanley thought they could milk this for all its worth(which would make sense why so many shares were sold off right after FB went public.)
Can Facebook grow Forever
This is a tough one to answer. It is obvious that poor execution is responsible for Facebook's leap from the $38 initial public offering to its low of $17.55. Although FB is now trading around $28, many investors are left doubting its expertise, and wondering if it will break even. Below is Facebook's prior three months. On January 28, FB hit a six-month high of $32.47.
After this s-x-month high, FB has retreated as analysts have downgraded this stock. Analysts learned that FB's desktop usage, which accounts for the majority of its revenue, is only projected to grow 3% in the next year. The growth is all being channeled through the mobile sector, which can become problematic for FB as desktop ads are much more profitable than mobile ads.
This chart depicts Facebook's user base from December 2004 to December 2012. This eight-year span displays the user base ranging from less than a million users to over a billion. In just eight years, gaining a billion users, many of whom use daily is a astronomical feat unknown to any other company besides Facebook. The advertising power and reach that FB posses is unprecedented.
So should I buy or sell?
Ah, the question that everyone wants an answer to. This is no easy answer, as their are conflicting principles battling on the grounds of public opinion vs. financial facts vs. growth. Which is more influential?
The only way to answer that question is with an opinionated view. Yes, Facebook's financial records are extraordinary with a few billion in the bank, it is one of the wealthiest company's of the 21st century. Its profits are rising each year, but will they be able to rise forever, and if not, how long until FB peaks?
The best way to come to a conclusion about Facebook's ability to grow, is by examining its users. Although I cannot copy and paste this map, if you follow this link you can view the amount of users each country has, and also the percentage of the population that uses Facebook.
To the surprise of many, Facebook has yet to penetrate into over 2/3 of the countries on earth. The one billion residents of Africa, and over four billion residents of Asia are almost all completely unaware of Facebook's existence. This is hard for someone living in America, or Europe to grasp, since it seems Facebook plays a everyday role in society.
With a population of over 7 billion, Facebook has yet to tap into the majority of the world.
In terms of growth, it would appear that Facebook has ample room to grow. With events such as Egypt's social media revolt, which led to toppling of the regime, it is obvious why some governments restrict Facebook. But Facebook is still slowly growing in Africa, with Egypt leading the way with over 16% of the population using FB (which is 5% higher than any other African country).
In many countries the government sees social media sites such as FB as the enemy, making it easier for citizens to revolt. China and Iran are two prime examples of countries that ban Facebook in fear that it could stir rebellion.
Governments opposition to FB only makes it look more attractive to citizens, especially those living in poverty against their will. This is where FB could flourish. As third world countries develop, FB will spread into the depths of the Congo and deep into the mountains of China.
Given the facts, I think that it is safe to say, FB is just getting started. Not only has Facebook yet to expand into most of the world, but it also has a ever abundant supply of 13- and 14-year olds who are just signing up for Facebook for the first time.
As long as FB doesn't make any radical changes (such as membership fees) then I believe FB will continue to steadily grow for the next 10 years, becoming one of the largest tech stocks, competing head to head with Google.
Right now is a great time to buy. I would recommend going long on FB. Who knows what the future holds? This stock easily could soar to being worth hundreds of dollars within a few years. Facebook has proven that it can recover from negative public perception, and as the pubic becomes more confident in FB I foresee that the stock will rise at a tremendous speed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.