What's Next For Facebook's Shares

| About: Facebook (FB)

Facebook's (NASDAQ:FB) initial public offering in May 2012 valued the company at $104 billion, the largest valuation to date for a newly public company. The company's stock debut at $38 per share was a disappointment as investors saw their investments dwindle to $17.73 per share by Sep. 4, 2012.

Since its IPO, Facebook shares have undergone significant analyst scrutiny. They have been buffeted by ambiguous earnings, and until recently were held down by a poorly-monetized mobile business. Following its latest earnings release on July 25, shares of Facebook rocketed to $34.36. This rally puts the company just 5 points shy of its issue price. To push its stock prices to new highs, Facebook must continue to monetize its mobile user base as it has finally begun to do.

Facebook surprises Wall Street

The company's second-quarter report came in well above consensus estimates. Analysts had Facebook earning $0.14 per share on $1.6 billion in revenues. The earnings release, and the following earnings call, reiterated how wrong the analysts were. Facebook brought home over $0.19 per share and $1.81 billion in revenues on a 1% increase in operating margins.

Where Facebook hit a home run was with its mobile subscriber base. The ads placed through its mobile platform now generate over 40% of the company's current ad sales, which is a 11% uptick year-over-year. This monetization is substantial, especially when considering that Facebook's rival Google (NASDAQ:GOOG) continues to have problems translating mobile ads into increased revenue.

Where Facebook's competition stands

Google's latest earnings release last week was disappointing to Wall Street. Its earnings-per-share was $1.22 below the consensus estimate. Google noted in its conference call how it has been struggling to squeeze ad revenue from its mobile customers. This is a surprise for investors as the company's stock inched its way to all-time highs. That being said, I wouldn't count Google out just yet as the global conglomerate seems to make a way where most businesses would fold under the pressure. I would not recommend buying Google shares at this price, however; it would be better to hold out for a pullback.

LinkedIn (NYSE:LNKD) being the more mature of the social networking group, has over 225 million members. This translated into second-quarter revenues of $324.7 million, a 72% increase from the same period last year. The number of registered members is also a 36% year-over-year increase. The key number is the company's online sales of $140 million, which is 43% of net revenue. This does not account for mobile sales, as the platform is more proprietary and focused rather than according to users' likes and tastes. This does, however, show relative valuations and metrics comparable to Facebook's if one were inclined to scale the companies to the same size.

LinkedIn's share price of $203.98 per share with a price-to-earnings ratio of 780 is not much more expensive than Facebook (as Facebook's shares trade over 720 times its trailing earnings.) I can't see LinkedIn's shares as having much more momentum behind them, however, at least for the next quarter. They are expensive, and should probably be shelved until a better valuation is reached to warrant entry into the company's stock.

What's next for Facebook's shares?

This excellent quarter is exactly what Facebook needed to finally crawl out of the rut it has been in since its first day of trading. As long as the monetization of its mobile user base can accumulate on its top line, Facebook's company and shares will warrant a stronger valuation.

I believe that the management of Facebook is savvy enough to figure out how to compete against its largest mobile-market competitor, Google, and be able to drive more value to shareholders. Considering this, I certainly agree with the analysts recommendations on the Street, and would buy Facebook shares at this point.

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. I have no business relationship with any company whose stock is mentioned in this article.

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