Facebook Success Rides On Knowledge Economy

Nov.26.13 | About: Facebook (FB)

Facebook (NASDAQ:FB) is a stock that has excited investors in the second half of 2013, as its disastrous IPO from a year earlier now seems like ancient history. In November CEO Mark Zuckerberg on ABC's "This Week" explained that the "knowledge economy" is the future of the U.S. economy, which means attracting the best talent to the country. Facebook is part of that future and the stock has traded higher than many expected this year.

Q3 Results

For Q3 2013, Facebook beat estimates but a comment from CFO David Ebersman about a slight sequential decline in U.S. teen users wiped out a 15 percent gain. COO Sheryl Sanberg responded, however, that the "vast majority of teens are on Facebook." Outside of that minor detail, revenue nearly doubled year over year from $1.26 billion to $2 billion while net income moved from a $59 million loss to a $425 million profit. Non-GAAP operating margin rose from 42 to 49 percent.

The most popular social network, which averaged 728 million daily active users in September, also reported advertising revenue of $1.8 billion, which was a 66 percent jump from the previous Q3. Mobile advertising accounted for 49 percent of Q3 advertising revenue. Non-GAAP costs and expenses increased from $737 million to $1.03 billion with capital expenditures of $284 million.

Super High Valuation

Reaction to the report was a downward trending stock that had moved as high as $54 per share leading into the October 30 report. The stock began its descent prior to earnings then continued to shift down below $47, which is still higher than its $25 price over the summer. The stock is now trading at over 110 times earnings, which has raised many questions if we are caught up in another tech bubble. Compare that with LinkedIn (NYSE:LNKD), which is trading nearly 1000 times earnings. Competitor Twitter (NYSE:TWTR), which isn't profitable yet, is also trading at an astronomically high level.

In the current climate high valuations seem to be the new normal, at least for new tech companies and at least for the moment. Another example of a high valuation that even surprised Facebook was Snapchat turning down Facebook's offer to acquire the photo sharing app company for $3 billion even though the company has zero revenue. The Snapchat app lets users take photos and record videos in addition to adding text and drawings. It was designed by a Stanford University student as a class project. It raises questions as to whether ideas can create value without any regard to marketing or finance in this new knowledge-based economy.

Facebook's Influence on Tech

The rise of social media in large part was sparked by Facebook, which offered a more user-friendly platform than the social networks it pushed out of the spotlight. Due to the ease of sharing online content, other tech companies now rely on Facebook to promote software and devices. Sony's (NYSE:SNE) PlayStation 4 is just one of many examples how the social network is redefining the concepts of knowledge and entertainment as the game console features a "share" button integrated with Facebook. Signing into PS4 now brings up Facebook feeds reporting game information about the user and his or her friends.

The share button, as well as the like button, in many ways generate ratings for the online experience and user influence for all types of organizations and interests. Even search engines now factor in these metrics for their algorithms in determining search rankings, although Google (NASDAQ:GOOG) has been more aggressive about making its Google+ social network have more prominence than Facebook in its rankings. These rankings affect web traffic, which ultimately influences website revenue for literally hundreds of thousands of businesses.

Engineering a New Marketplace

One of the ways Facebook creates value for both casual users and businesses is the fact that it is turning into a trusted tool for buying and selling, much like Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY) or Craigslist. Facebook now allows people to quickly sell items for extra cash. It's creating a second-hand market for bargain hunters. Since Facebook has already become an intimate part of people's lives, even more than common blue chip mainstays, it's in a position to become an e-commerce solution for entrepreneurs.


Not many companies resemble the Facebook business model of the future yet, but there's a chance we'll be seeing more examples if the knowledge economy that Zuckerberg predicts continues to blossom at high speed. Facebook certainly isn't just a flash in the pan wild west fluke. It's clearly here to stay and should be regarded as a component of a new infrastructure for the entire business community. The stock may be over-priced, but it also reflects a rule-changing revolution. It's a stock to watch on dips, but in the bigger picture it could be a blue chip of the future.

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.