The Argument For Peak Facebook

| About: Facebook (FB)

Summary

Facebook's mobile apps are having their moment.

A $22 billion run rate, with one-quarter of that hitting the net income line. Buy, buy, buy.

Most companies have one magic trick. Chances are Facebook does not have another.

Facebook (NASDAQ:FB) is having a moment right now, a moment as powerful as any achieved earlier this decade by Amazon.com (NASDAQ:AMZN), Apple (NASDAQ:AAPL) or Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL).

Earnings slammed estimates, which I anticipated early in the month, and sent the stock soaring to $120/share. That means it is now worth $342 billion, more than Amazon, only $50 billion less than Google, and just $150 billion less than Apple.

Its mobile apps, especially WhatsApp's Messenger, possibly the greatest tech purchase of all time, mean the company now has 1.65 billion users, more than half mobile-only, many of whom spend nearly all their free time inside its software.

The resulting numbers speak for themselves. A $5.4 billion quarter, with $1.5 billion falling to the net income line. Free cash flow came in at $1.85 billion, and there is $20.62 billion of cash on hand.

Fivethirtyeight.com this week did an experiment, based on a silly column by Politico co-founder Jim Vandehei, testing how Hillary Clinton and Donald Trump might do in an election against Mark Zuckerberg. Zuck crushed. (At 31, he's ineligible this year).

So how can anyone dump on Facebook? Mark Zuckerberg is King of the World.

Here are two reasons.

First, where does Facebook go from here? How much more can it increase its audience or engagement? There are only so many phones and so much time. And can it really increase those margins?

There are things it can do. Different ad formats, different file formats, Oculus Rift. But on a $22 billion run rate, these improvements are going to be incremental on the top or bottom line. Facebook is what it is and what it is going to be. Not that there is anything wrong with that, Google is a nice little business too. Facebook has the cash to buy any powerful mobile app that may emerge, but how many more WhatsApps are there?

Second, there is going to be another tech revolution, maybe right around the corner, and odds are Facebook won't lead it. It's playing in bots, it might try the Internet of Things, but history says even the best company has one magic trick. Google had search, Apple had mobile devices, Facebook has mobile apps. A bureaucracy is already developing in the company, by necessity, aimed at maintaining what the company has.

The market has a hint of this. Otherwise the stock's gains this week would have been more than $10/share. But it deserves to be said, just as the jester in the Middle Ages said to the King. Eventually you, too, will die.

And given what has happened to Apple lately, that may happen sooner rather than later. Clouds, devices, and mobile apps mean everyone can now hold a supercomputer in their hands, attached to the most powerful processing systems ever devised, and to networks of infinite storage.

Change is going to accelerate. Tomorrow is going to come very, very quickly. Somewhere out there is a kid who is going to challenge, maybe even beat Zuckerberg in a fair business fight. While we're cheering Facebook's moment, we need to remember that.

Disclosure: I am/we are long AMZN, AAPL, GOOGL.

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.