Portfolio Managers look to manage a client's asset allocation to balance risk and return. As client portfolios become more conservative assets are shifted to fixed income investments but the equity allocation remains to ensure reasonable income and asset growth ensuring purchasing power over a longer time horizon.
When managing the equity managers seek diversification across several industries and sectors looking capture returns from the growing economy while avoiding significant risk to any factor that may harm a industry or sector within the portfolio.
As industries and sectors emerge portfolio managers must weigh alternatives for incorporating them into equity exposure. Stocks within emerging sectors are often characterized by higher betas with less predictability in their ultimate investment value but with substantial upside as their markets mature.
While many companies emerge early in the industries lifecycle only for consolidations and failures. Stock selection is critical to identify companies at the forefront of the industries evolution and shrewd acquirers capable of consolidating capabilities to attain market leadership. For several reasons Facebook remains the best investment in the social media space.
1. FB is rapidly evolving its platform with emerging trends. In the social networking space Facebook's (FB) acumen is well known. Beginning as a a web based platform FB quickly overcame other early emerging platforms such as Myspace and moved to dominate the mobile environment staying ahead of new entrants such as Google's (GOOG) Google+ platform. FB is now in a dominant position with only Linkedin (LNKD) and Twitter (TWTR) finding considerable niches to operate.
2. FB has been a shrewd acquirer not only finding great value but strategic fits to further commercialize the existing platform. FB's Instagram acquisition was beneficial to improving the web platform and aided commercializing the mobile platform by increasing mobile user usage but translating to meaningful user content driving revenue.
The widely publicized Whatsapp acquisition benefits FB on many levels. First it refreshers their user base at a time when youth traffic is struggling. Second it leaps FB into one of the fastest growing areas of mobile new user adoption. And lastly opens new commercial avenues in voice and text communication
3. FB offers considerable value when compared to similar social media stocks. FB trades at a modest premium to LNKD on a price to sales basis. As earnings metrics become more important than revenue growth in the sector FB trades at a discount to LNKD on both trailing price to earning and forward price to earnings basis. As FB appears better positioned to commercialize new users and capabilities than LNKD it offers substantial relative investment value.
In conclusion adding emerging sectors to a portfolio brings many challenges with stock selection key to realizing returns in the long run. FB's acumen for remaining ahead of the curve in evolving its platform, shrewd acquisitions, and using acquisitions to commercialize and evolve its platform make it the market leader. From a relative value point of view the stock has more upside when compared to similar but not as well positioned stocks.
FB and Linkedin By the Numbers (Source: Yahoo Finance)
|Market Cap ($mil)||174,890||23,220|