Facebook: Why You Should Grab This Tech Firm Today

Aug.23.13 | About: Facebook (FB)

When Facebook (NASDAQ: FB) announced its earnings for the second quarter of 2013, the social networking giant became arguably the most popular stock on the market. In a matter of hours, Facebook's stock increased 26% to $33 as investors understood Facebook's staggering accomplishment: turning an uncertain mobile platform into an impressive generator of revenue.

Days later, Facebook reached its much-maligned IPO price of $38, and the stock is currently trading just above that price. Now, some investors are saying that Facebook rose too quickly, and that a correction is coming soon.

I say no. Here are three reasons to buy and hold Facebook.

1. Effective mobile strategy

Most importantly, Facebook is proving doubters wrong by finding a way to monetize its mobile services. Last year, Facebook publicly stated that it didn't have a way to advertise on mobile devices. This led many to say Facebook is behind the times and that the firm would die along with the PC industry. Then Facebook's recent earnings came out.

Not only did Facebook beat expectations with revenue of $1.81 billion, but 41% of Facebook's revenue came from mobile advertising. Mobile revenue jumped from $375 million to a promising $656 million, a 75% increase. Facebook's monthly active mobile users jumped 51% to 819 million, while daily mobile users reached 469 million.

Facebook's "Mobile First" strategy even surged ahead of Google (NASDAQ: GOOG), which, according to research firm Trefis, gets only 32% of its value from mobile advertising.

In order to further its strategy, Facebook is now developing a way to allow users to download payment information directly to retail websites such as Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). Storing such data online would save users time, as they would have no need for repeatedly typing in payment information on a small smartphone screen.

However, the process goes deeper than a convenience to customers. Far more important: the service allows Facebook to collect more data on users. The more Facebook knows about the likes and purchasing habits of its 1.15 billion users, the more specifically advertisers can use Facebook to target consumers.

2. Here come the videos

Even though Facebook's highly anticipated video ad platform hasn't yet been released, the eventual release will do wonders for Facebook. Why? Because video ads are revenue drivers.

Look at Google's YouTube, for example. According to Trefis, 8.8% of Google's value is derived from YouTube. That is a chunk of change considering that Google hauled in revenue and profit of $50.2 billion and $10.7 billion in 2012.

In quarter one of 2013, YouTube pulled in an estimated $1.4 billion in revenue for Google. Video ads on YouTube cost advertisers about 0.30 per view, which adds up very quickly. If a video gets 1,000,000 views, Google makes $300,000. Compare that to the often minimal amounts that Google makes on its standard AdWords ads that appear at the top of Google Searches. With AdWords, companies can design their own budget for as little as $10. Since Google's YouTube purchase in 2006, Google's stock has more than doubled. Obviously, Google has numerous growth drivers, but the video content of YouTube is a big reason for Google's bright future.

Facebook's future also looks bright as the company begins marketing video ads. As it is, Facebook's newsfeed ads are effective, but they are cheap. Facebook allows advertisers to tailor their own budget for regular ads, similar to Google. These ads make money, but I see Facebook charging much more for video ads, thus increasing revenue in a big way.

3. High P/E? Not a problem

When Facebook jumped in July, many investors jumped to the conclusion that Facebook is overvalued. Perhaps, but that is no indication that Facebook is going to drop.

Facebook's P/E ratio is currently about 188, which does seem high at first. But let's take a look at another tech company, Amazon. The firm grew like clockwork since its IPO in 1999, and its P/E ratio was continually in the 40s or 60s - which many considered overvalued back then. Now Amazon doesn't have a P/E ratio because of losses in recent quarters, but the ratio hit close to 3,500 in 2012, a number so high that perhaps investors stopped even paying attention to it.

Is Amazon's stock imploding? Hardly. In fact, quite the opposite is happening. Since 2011, Amazon's stock increased over 56% and has even broken the $300 mark. Investors want Amazon because Amazon has a solid business model that is growing. Even amid a $7 million loss in the second quarter of 2013, Amazon had revenue growth of 22%, underscoring the fact that Amazon is investing in the long term.

All of this is to say that investors need not despair over Facebook's high P/E ratio. A strong business model goes a long way with investors, and Facebook CEO Mark Zuckerburg is proving that his model is sustainable and profitable. Investors believe in Amazon CEO Jeff Bezos, and I think they are starting to believe in Zuckerburg as well.

Also, don't forget that Facebook's P/E ratio in January was upwards of 7,500 because of profit trouble. Of course, correctly or incorrectly, such a comparison makes Facebook look like a bargain at 188.

Bottom line

Facebook's impressive quarter was just the beginning. I've been bullish on Facebook for some time now and I'm a believer in what the future has to offer. As Facebook continues its Mobile First strategy and begins to follow in Google's footsteps with video ads, the IPO price of $38 will be left in the dust.

I would go long today before Facebook reports another stellar quarter.

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.

Additional disclosure: This article was written by Randy Holcombe.