In my mind, the single most successful trait of Steve Jobs was that he and Apple Inc (AAPL) have made products and experiences people wanted before they knew it themselves and understood before they used them. They are products and experiences that are, if summed up in a word, intuitive. Companies that sell something so intuitive and profitable on a global scale are rare and are rewarded. I believe Facebook (FB) was, is and will become much more so one of those enterprises. You may argue with me on that point but you would probably be in the minority as Facebook counts 900 million of the world's 2.2 billion internet users as members. Read that again.
Current Bearish Sentiment is well placed
Let's be honest, Facebook probably doesn't stand a chance over the long-term as an ad driven enterprise that allows friends to poke each other and post farming scores on their "friends" walls. Facebook makes a pittance in ad revenue per user ($4.34 globally) and its mobile prospects are showing even worse numbers. Still, the profit margins are nothing to shake a stick at, it's the growth prospects that have bears salivating.
You might also be wary of Facebook's recent $1B purchase of Instagram. Many see this is a complete waste of money or paranoid. I look at it as competitive foresight. By buying Instagram, Facebook has effectively stolen photo sharing from the jaws of Twitter who was also bidding. By owning the premier photo sharing app, Facebook is able to add exclusive features, and extensions while redirecting users to itself.
Future Potential is undervalued
It's silly in my mind to think that the company has been valued so highly based on the growth potential of its current revenue streams. Facebook is valued on what it will do with nearly 1/7th of the earth's population. Let me give you a hint, Facebook will sell something. More precisely it will let its users sell that "something". A song, a movie, a ticket, an item of clothing, an app. Facebook is the ultimate peer review and word of mouth is a powerful sales tool. Facebook only needs to collect a transaction fee. The pieces aren't all assembled, but that is a gift from Mr. Zuckerberg, in my opinion. He is willing to attract everyone (or at least almost everyone), learn what they "like" and then do something with it.
The fact that Facebook makes some money on ads is almost funny to me. Who cares about paltry advertising dollars per user when with a few lines of code and an agreement you could sell the products directly and take a generous cut (Apple's App store, iTunes anyone?). The opportunities for making money are endless when you have the world's attention and don't squander it.
Let's list some quick cash grabs Facebook could easily end up implementing:
Social Commerce: Etsy+Ebay (EBAY) on Steroids
Normal Commerce: Amazon (AMZN) on Steroids
Payment Processing: Paypal on Steroids
IP (Intellectual Property) Sales/Subscriptions: iTunes+Spotify+Netflix... you got it, on Steroids
Platform as a service (See Apps, think Force.com from Salesforce (CRM) and Amazon AWS)
Added to all of the easy ways to make money that if Facebook actually releases a phone or device of some sort as is being reported every day, you can bet that it will take some serious market share from iOS and Android and may actually change how we communicate. I personally think such a hardware partnership would be with Nokia (NOK) given the Microsoft (MSFT) stake in Facebook and the partnership between Microsoft and Nokia. Also considering the low barrier to entry with Nokia currently on its hands and knees looking for partners. I only have a phone number because the entire world doesn't have Skype.
The reason institutions are behind it is Mark Zuckerberg. And don't believe the hype, institutional investors are and will be glad for the price to drop further, 13F fillings later this year will show this beautifully, mark my words. Why? Zuckerberg's the real deal. He may have built Facebook on a whim, but he's grown it into something light years from whimsical. I think he has and will patiently wait for the right opportunity, profitability and investment to change how we do business, how we communicate and how we are entertained. This is the kind of company you want to invest in early.
My thoughts on a trade?
One might consider going long and selling covered calls and buying protective puts with the proceeds. I hope macro and the bears have their way with this stock, but even without that, I plan on going long as I consider Facebook undervalued in light of the potential. Options begin trading on Tuesday and I may open a straddle on it before I start a long-term hold as it will likely be volatile for a while. A straddle is an options strategy where you purchase Puts & Calls at the same strike price and generally At the Money. For example, I might buy to open a June $31 Put & a June $31 Call on Facebook in order to profit from larger swings in the stocks price as options trading begins and the bull & bears wrestle.
Disclosure: I have no positions in any stocks mentioned, but I may open a weekly or monthly straddle on FB and or AAPL on Tuesday.