Facebook Proves That It Is Different

Jan.31.14 | About: Facebook (FB)

Many times when people talk about the bubble stocks in the market they name Facebook (NASDAQ:FB) along with names like Yelp (NYSE:YELP), LinkedIn (NYSE:LNKD), Pandora (NYSE:P), Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA). I always argued that Facebook is different from these stocks and the only social media stock I would actually consider putting my money in. As the company announced its earnings for the fourth quarter of the year, Facebook showed us why it is different from other media stocks.

First, let's take a look at Facebook's results. The company generated $2.58 billion in revenues and 31 cents per share in net income for the quarter; whereas, the analysts were looking for $2.33 billion in revenues and 27 cents per share in net income. The company's quarterly revenue represents a growth rate of 63% year-to-year. For the full year, Facebook generated $7.87 billion in revenues and $2.20 billion in net earnings, up from the previous year's $5.09 billion in revenues and $1.31 billion in net earnings.

During the year, Facebook added 172 million members that are monthly-active (i.e., logging in to their account at least once a month) and 139 million members that are daily-active (i.e., a subset of the monthly-active members who login to their accounts daily). The current rate of daily "likes" were 6 billion in December, up 59% from previous year's 3.8 billion. This indicates that despite its massive size, Facebook continues to add new members and its existing members continue to engage more actively in the website.

So, why is Facebook different from other social media stocks? Well, there are several features that make Facebook superior to other social media stocks, most of which are in a bubble zone as we speak. The first and most important difference between Facebook and other social media stocks such as Yelp and Pandora is that Facebook actually has a feasible business plan that has proven to be profitable. In the last year, Facebook increased its advertisement revenue by 76%, and 53% of its advertisement revenues came from mobile devices. Last quarter was the first quarter Facebook generated more than $1 billion in mobile advertisements ($1.25 billion to be exact), which proves that Facebook's mobile initiative is working much better than other social media companies. The company is becoming more profitable each year by cutting costs and growing its revenues. In the fourth quarter of 2013, Research and Development costs made up 16% of Facebook's revenues, down from 19% a year ago. The marketing costs (as a percentage of revenue) are down from 12% to 11% in the last year and administrative costs are down from 11% of revenue to 10% of revenue. As a result, Facebook's GAAP income rose from $523 million to $1.13 billion between the fourth quarter of 2012 and fourth quarter of 2013, whereas most social media companies don't even see profits to begin with and they certainly see no profit growth. When was the last time Pandora or Yelp saw net profits?

Companies like Yelp and Pandora have been trying to figure out a way to make money (isn't that the whole point of starting a company or investing in a company in the first place?) with very limited success for about a decade. Most companies in the social media spend more money than they generate and they truly have no idea how to generate more money than they spend. They don't know how to cut costs, and they don't know how to increase their revenues without spending a bunch of money. Facebook is different because it found a way to make a profit and it is able to grow profitably so. Many times those who are bullish on companies like Yelp and Pandora say that it is impossible to see high-growth and profitability simultaneously and that a company has to give up from one to obtain the other, but Facebook shows us that this is not necessarily the case.

The second reason is related to the first reason. Facebook has very strong margins. While Yelp, Pandora, Groupon and Twitter either get negative operating margins, or single-digit positive margins in their best quarter, Facebook consistently gets operating margins near 50%. Last quarter, Facebook's non-GAAP operating margin was 56%, up from 49% in the previous quarter and 46% in the same quarter a year ago. Let's put it this way, Facebook's operating margin is higher than its peers' gross margin. In other words, Facebook takes its gross profits, adds research, development, marketing and administration costs and its margins are still better than its competitors gross margin. When it comes to profitability in social media, Facebook is miles ahead of the competition.

The third reason is that Facebook actually found a medium where both advertisers and consumers are happy with the product. Many of us have heard about how Yelp's advertisers are unhappy with the company's marketing practices and many social media companies have to make a decision between their user base and their advertisers. Facebook is the only social media company that actually found the perfect balance where advertisers and users seem to be fairly happy with how the product turned out. Unlike other social media companies, Facebook is a website where millions of people visit every day and spend hours interacting with their friends. This is different from Groupon, Yelp or Linkedin where a user might visit the website anywhere from once a week to once a month for a few minutes to check out a local deal or career opportunities. Unlike other social media companies, Facebook users are actually engaged with the product and they actually spend time with the product because they are happy with how the product is laid out.

Fourth, unlike other social media stocks, Facebook is big enough not to get wiped out by the competition easily. Large companies like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) could always come up with a solid product that will threaten the very existence of companies like Pandora, Groupon, Yelp or Zynga, but it is very difficult for them to do this to Facebook. The company reached a size where it will not be easily beaten down.

According to Facebook's quarterly release, the website now has 1.23 billion monthly active users and 757 million daily active users. About 62% of the website's users login to their account daily and 553 million daily-users come from mobile applications. Facebook currently has personal data of every 5th person on the face of the earth and this gives the company a tremendous power in targeted advertising. There has never been any company in the history of the world (not even Google) who gained so much information about people, their everyday lives and even their friendships to the point that it can actually present people with high-yielding targeted advertisement which will gain acceptance from users. The company now makes more revenues from mobile platform than it does in the PC platform. Just last year, many people including me were questioning whether Facebook would ever be able to monetize its mobile users. The company has accomplished a lot under the leadership of Zuckerberg and this is just the beginning.

The company has proven many doubters -including me- wrong and I am happy to admit that I was wrong about Facebook last year. This is one social media company that is completely different and miles ahead of the competition. In fact, much of the competition might go out of business before it catches up with Facebook.

Disclosure: I am long FB. 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: I have both calls and puts of Yelp, LinkedIn and Pandora.