Why Hedge Fund Traders Like Facebook

Sep. 4.13 | About: Facebook (FB)

Omega Advisors, which is managed by Leon Cooperman, sold 3.67 million shares of Facebook (NASDAQ:FB), according to 13F Fillings with the US Securities and Exchange Commission.

However, other hedge fund traders are not following its footsteps. Tiger Consumer Management, which is managed by Patrick McCormack, now owns 4.8 million shares of the internet provider company. This is up from 3.6 million shares.

Christopher R. Hansen, who manages Valiant Capital, increased his stake by 4900% at the end of March. Fellow hedge fund traders, David Goel and Paul Ferri, who manage Matrix Capital Management, increased their stake in Facebook by 200%. During the same period, Alyeska Investment Group also increased its stakes by 100% to around 900,000 shares.

Investors who want to emulate the spending of big money managers should be careful. Some of the fillings do not reflect current buying or selling activities. However, they provide a positive snapshot of traders' holdings in Facebook. So why are they investing in the company? The truth is no one knows for sure, but let's look at some of the possible reasons.

Financial

Revenues of Facebook were up 53% in the second quarter from the same period a year earlier. Much of the gain came from the mobile sector, which now accounts for 41% of the company's revenues. GAAP costs and expenses for the second quarter of 2013 were $1.25 billion, a decrease of 35% from the second quarter of 2012. GAAP operating margin was 31% for the second quarter of 2013, compared to a negative 63% in the second quarter of 2012. For the second quarter of 2013, GAAP net income was $333 million, compared to a net loss of $157 million for the second quarter of 2012. Analyst expectations for the next fiscal year imply a forward P/E 43, likely because products such as Verified Pages and Facebook for Every Phone are predicted to show growth.

Insider Trading

Insiders hold 194.7 million shares of Facebook. We should note that while a number of insiders are bullish on the stock, quite a few are not. 29 insider trading took place in August. 21 were direct sales, 7 were acquisitions, and 1 was a disposition. Still, insiders are holding substantial amounts of shares

Competitors

Other internet information providers include Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT). Facebook's operating margin at 31.06% is impressive compared to Google (23.95%). Microsoft, however, outperforms Facebook at 34.38%.

Looking at Facebook, there is nothing remotely risky concerning the company's financial health. From a valuation standpoint, a PEG ratio of 1.97 is respectable, even though it is less attractive than 1.34 for Google and 1.41 for Microsoft. Facebook has a beta of 0.8, which is low. It is more attractive than 1.09 for Google but slightly higher than 0.77 for Microsoft. The company's debt equity (17.55) is lower than 112.01 for the industry and 20.64 for Microsoft. Worth noting is that Facebook's estimated EPS growth in the next five years at 29.59% is greater than 14.52% for Google and 8.63% for Microsoft.

Analysts

On the strength of its recent performances, BTIG Research upgraded the stock from sell to neutral, saying it was wrong about the company. UBS also upgraded it from neutral to buy. Stifel upgraded Facebook from hold to buy on a price target of $50 a share, saying the company has the ability to make profit in key areas.

Macroeconomic Environment

Dependent on cloud IP traffic, the future of internet information providers is bright. Specifically, cloud IP traffic will grow 44% from 2011 to 2016. Increases in data center traffic will ease the work of internet information providers. Both of these two factors will benefit Facebook.

Conclusion

Facebook surpassed one million active advertisers in the last quarter. The achievement was accomplished through significant growth in local businesses. The company expects to grow its mobile revenues in the next quarter and deliver strong financial results. No wonder hedge fund traders like Tiger Consumer Management are increasing positions in the company. They want to benefit from future financial windfalls.

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.