Is This Stock Ready To Make A Comeback?

| About: Facebook (FB)

Facebook's (NASDAQ:FB) IPO back in May could go down as the worst of all time. After initial excitement taking the stock price from $38 to $45 in early trading, the stock crashed down to $38 several times over the course of the day where the investment bank supported the price. Earlier this month, the price fell lower than 50% of the IPO, but good earnings and a stellar conference call from CEO Zuckerberg give hope for the company yet.

The biggest hurdle for Facebook over the last year has been its inability to monetize the mobile application effectively. More users access on mobile devices than on desktop computers. The failure to gain significant revenue from close to 60% of users was the main driving force behind the stock's underperformance.

On Tuesday's conference call, Zuckerberg gave investors great news on the mobile front - 14% of total ad revenue came from mobile users. While this number may seem small, it represents a 300% increase in mobile ad revenue sequentially. Certainly, numbers will not continue to grow at that rate, but to expect a 100% increase in mobile revenue for next quarter is not irrational.

Facebook came late to the mobile game, only starting serious concentration on monetizing mobile apps in February. Its main focus has been on the iOS app. Having improved the user experience and advertisers' returns significantly through Apple (AAPL) devices, the company can shift more focus onto Google (NASDAQ:GOOG) Android phones and tablets.

With over 40% of the tablet market and nearly 70% market share in smartphones, Android devices are another huge market for Facebook to optimize. If in the next six months Facebook can improve advertising on Android smartphones as they did with iPhones, mobile ad revenue could easily increase 2 to 4 times.

The biggest reason for Facebook's success in mobile advertising is that advertisers are making more money from Facebook ads. The click through rate [CTR] for advertisement on improved 81% in Q3. The rate is double for mobile users compared to desktop users. This means more people are looking at advertisements on Facebook, thus the cost per click to advertisers is lower. Lower prices per viewer, mean advertisers realize a higher return on investment.

Given that Facebook accounts for 20% of total page views on the internet, the company could capture a proportionate amount of online advertising revenues based on its value to advertisers. With global spending between $80 billion and $100 billion on online advertising and a significant shift toward mobile devices, Facebook is in a good position to see huge revenue growth in the coming years.

One issue facing Facebook is the decline in Zynga (NASDAQ:ZNGA) game sales on the website. The creator of Farmville has floundered as of late, and Facebook revenue from Zynga dropped 20% sequentially. However, Zuckerberg made it clear on the conference call that other Facebook game developers are doing well and that the problems are with Zynga and not Facebook. I expect Facebook to gain sales revenues through Zynga's attempt to recover with Farmville 2.0, which ought to prove very popular, and new game development from companies attempting to capitalize on weakness in Zynga.

The competition in social network technology is minimal. Google continues to develop its Google+ network, and LinkedIn (NYSE:LNKD) is the go-to place for professional networking, but Facebook really is THE social network. is the second most visited website after I expect Google to continue developing Google+, but the likelihood of a major shift in active users over the coming years is marginal at best.

Google is still struggling to monetize mobile devices effectively. Where Facebook is now able to charge a premium on its mobile ads, Google receives prices 40% to 50% lower. The market is shifting toward mobile, and advertisers looking to get the most for their money will likely choose Facebook over Google.

Facebook currently trades at a forward P/E ratio of about 34.5 and a 5-year estimated PEG ratio of 1.65. This represents a premium to Google, which trades at a forward P/E around 14.6 and a 5-year estimated PEG of 1.26. However, I believe Facebook's growth ought to outperform Google's performance.

Consider that Facebook's latest earning report show a profit of $311 million on $1.3 billion in revenue over the last quarter. That represents about a 24% net profit margin. Also, consider that Facebook is still getting started in monetization relative to Google. There is a good chance that margin will improve along with a growth in total revenues. Furthermore, Facebook only just started tackling its biggest market in mobile devices where advertisers will pay a premium for its highly effective platform. Margins will improve with higher ad prices on mobile, and this will drive growth even further for Facebook.

Facebook does face several risks. First, emerging markets monetization remains a problem for the company. While average revenue per user [ARPU] remains high in the U.S. and Europe, at around $3.40 and $1.37, respectively, Asia comes in at a dismal $0.58, with the rest of Asia at $0.47. In addition to this, many phones in emerging markets do not support Facebook's mobile ads.

With shares of the stock trading around the price of $22, I believe now is a good buying opportunity for investors. The issue that plagued them less than six months ago during its IPO days is now one of Facebook's biggest strengths. In that short period of time, Facebook transformed into the most effective form of mobile advertising, which is where the money is headed, and is poised to capitalize on the growing market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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