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I've obviously been writing about Facebook for quite some time on this blog and while I've been very fortunate in how things have played out, I still think it's a fascinating story no matter how you look at it. At the time of the IPO, I strongly believed Facebook was a great value at those levels but I was obviously in the minority and since I tend to stay away from newly turned public companies for the first few months (I hate the initial volatility), I did end up buying a few months later. As you can imagine, if I thought $38/share was a value, getting in under $20 was a steal. There was risk involved (there always is), but in terms of upside vs. downside risk, it was a no-brainer.

Much of the criticism of Facebook's valuation was based on:

-Doubts about Facebook's ability to remain the dominant social network (FB = MySpace)
-The limited available growth in terms of users (if FB growth = user growth, then how much further can you get past 1B? and more importantly, how valuable in the short term is that 2nd billion users?)
-Revenues: If mobile was going to mean less of those big flashy banner ads, then was Facebook doomed when internet moved to mobile?

I personally discounted the last 2 arguments and believed the first one was possible, especially if Facebook made some big mistakes, but unlikely. Over time, more concerns have been added:

-Younger generation moving away from Facebook
-Users splitting their attention between an increasingly large number of social services
-etc

That being said, by all accounts, Facebook has been delivering in an incredible way in the past few quarters. Just look at growth in users, revenues and earnings:

Source: FB earnings slides

When I look at Facebook's stock near the $75 level (point it reached yesterday in after hours trading), I continue to see tremendous upside. Why? In my opinion, there are 5 clear steps for Facebook and while all of these will be on-going, I'd say Facebook is barely into step #2:

-Step #1: Building and Never Stop Improving and Building: Clearly, Facebook already has the top social network around but has continued to build on it both through its own efforts (improving core Facebook, messenger app, etc) but also through acquisitions such as Instagram, WhatsApp, etc.

-Step #2: Build an Advertising-Based Business: Facebook started off with those flashy banners but has moved beyond those to news within the newsfeed, app installs, etc. They mentioned on yesterday's call that in many countries the ads are being perceived as nearly the same quality as the other contents. Clearly, there is still a long way ahead but Facebook is making great progress as we can see in their impressive growth. I believe that will continue but perhaps even more important is Facebook's ability to sell ads outside its walls, thanks to its growing relationship with other app developers, its integration of Liverail, etc. Facebook is only getting started here.

-Step #3: Other Revenue Efforts: As of right now, efforts such as payments, ecommerce and subscriptions are minimal as they should be. But I strongly believe that these will represent a huge stepping stone in the coming decade. There are much bigger gains in advertising right now but as the internet continues to mature, as smartphones spread and as Facebook's ecosystem and the outside world adapts, revenue opportunities will emerge and I think this will be a focus in a few years.

-Step #4: Full Integration: I'm clearly not a believer in Facebook integrating Instagram, WhatsApp or other "products" into Facebook but if Facebook does make progress on elements such as payments, advertising, etc, it will clearly be able to slowly integrate some of those features into those products. There is no reason to rush this. Those products are not as mature and the focus is on step #1 but I think they will reach that point in the future.

-Step #5: Future Platforms: Mark Zuckerberg discussed this a bit in yesterday's call. Clearly, while Facebook has what I consider to be an ecosystem, it does not control things the same way that Apple and Google do because those 2 players own the dominant mobile O/S. One day, as we have started moving away from desktop computers, smartphones will start losing market share to newer mediums and Facebook believes the Oculus Rift purchase will help Facebook be in a better position in the next "platform" than it is on desktop or mobile platforms.

So yes, Facebook is just getting started and the upside remains very significant in a market where most see Facebook's end game as advertising.

FB Chart

FB data by YCharts

Disclaimer: Long Facebook (NASDAQ:FB)

Source: Facebook Reports Impressive Results But It's Only Getting Started