Reasons To Add Facebook To Your Stock Portfolio

May.30.13 | About: Facebook (FB)

The once-promising Facebook (NASDAQ: FB) has become an investor's nightmare, with stock prices dropping from the $38 they were priced at during its IPO to a closing price of $24 on Tuesday, May 28. Those who were able to buy in during the IPO and believed that their shares would make them rich have seen their holdings fall by more than 36% from the initial price. Should investors sell out their FB shares now before they fall further, as they did on September 2012 when they fell to an all-time low of $17.73, or is there still hope for Facebook to become an asset to their portfolios?

Facebook Stock Overvalued

Savvy investors at the time of the FB IPO in May 2012 understood what many of those who bought in to the stock didn't - that it was overpriced relative to what its fundamentals then were. The IPO was expected to bring in around $100 billion. But analysts noted that the company's growth was slowing down, with total revenue increases slowing from the 154% recorded in FY 2011 to just 37% in FY 2012. Meanwhile, income from operations actually recorded a decline from FY 2011 to FY 2012 of nearly 70 percent. These performance indicators highlighted how the market valuation at the time of the IPO was unwarranted.

However, the company has begun to become profitable again. In its Q1 2013 earnings report, FB reported revenues of $1.5 billion, an increase of nearly 38 percent from the same quarter a year ago. It was also profitable over the four quarters of 2012, with average increases of 37 percent.

Facebook also has to face the simple fact that it is no longer as popular as it used to be. In the US, the site lost some nine million visitors over the past six months ending in April and two million less visitors in the UK over the same period. FB visitors are also declining in major markets such as Japan, Canada, Spain, Germany and France, where the site has some of its most loyal following. The decline was attributed to user fatigue, as most of those who were interested in signing up for a Facebook page had already done so, and old users were starting to look for new experiences.

Users were flocking instead to new social networking experiences such as Instagram, a photo sharing site that was recently acquired by Facebook, and which currently reportedly has some 100 million users, and Path, a social networking site that is based around mobile phones, and whose membership figures have topped ten million, with an estimated one million more signing up each week.

Facebook's New Initiatives

All is not lost for Facebook, however, as the site has launched some new initiatives that could help it become relevant again. For example, it has launched Facebook Home, an app designed specifically to appeal to smartphone users that feeds updates from Facebook friends directly onto the phone's locked home screen. In an attempt to increase advertising revenues, it has also launched ad targeting initiatives such as Partner Categories, in which Facebook's more than one billion users are grouped into 500 unique categories to better allow advertisers to target their desired audience.

In addition, it is rolling out Facebook Gifts, a service that allows users to buy small gifts for friends, which expanded to all US markets in December 2012 and is currently being expanded to countries such as the UK, Canada and India, in the hope that it would represent a new revenue stream if it takes off.

A more intangible thing that Facebook has going for it is the vision of its founder. Mark Zuckerberg was recently rated the business world's top CEO for 2013, and Facebook was also ranked the best place in the US to work. Key to his vision is that Zuckerberg founded Facebook not primarily as a profit generator, but as a way of connecting the world, and this vision has helped motivate employees.

The Bottom Line

The fact remains that online social networking is no longer simply a phenomenon, but a reality of daily life; and Facebook still remains the elephant in the room, the site that started it all. Even if people are showing some fatigue, the site still has more than a million users. A recent survey showed that the average American visits the site an average of thirty five minutes daily, which is spread over fourteen visits a day. And there is still plenty of room for Facebook to grow in overseas markets. In Brazil, for example, Facebook visitors increased six percent in April to 70 million, while visitors from India grew to 64 million, a four percent increase.

In other words, Facebook's stock price does not really reflect the state of the social networking site, which is still healthy and should be a 'buy' for investors who want a good long-term addition to their portfolios.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.