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Facebook Widens Its Social Media Footprint

28 February 2014 in Trading Ideas

Just as investors have wrapped up their collective applause for another expectations-beating quarter from social-networking giant Facebook, the company just turned things up a notch with the biggest deal in technology so far this year.

With Facebook’s shares recently cruising above $70, it’s easy to forget they were hanging out at $55 just four weeks ago. That’s a jump of more than 28%.

Of course, many Facebook investors were happy enough with the stock at $55, considering shares were languishing at $25 no more than seven months ago.

But the key to Facebook’s investor renaissance – and which was reiterated with its most recent earnings report – is that the company is proving that its ability to capitalize on the move by its users to mobile devices.

 

It also showed that it is able to squeeze more money out of each user, on average. Facebook said total revenue in its latest quarter jumped 63%, while profit rose eight-fold, but perhaps most importantly the company said its average revenue per user rose 24% from a year ago.1

Meanwhile, Facebook said mobile-advertising accounted for more than 53% of total revenue, which was up from 49% just three months ago, and 23% a year earlier.

Little did we know that the announcement would be old hat after Facebook shocked the tech sector a couple of weeks later with its news that it was spending $19 billion to buy WhatsApp, a five-year-old messaging app startup that barely charges any of its users.

Analysts and prognosticators alike seemed to astounded by the price, only to become relatively more calm when they were reminded that a) the newly acquired company’s 450 million global users total about 50% more than Twitter, and b) the purchase price of $42 paid for each user wasn’t extraordinarily different than the $30 paid by Facebook to acquire Instagram, and was only 9% more than Google’s cost of buying YouTube in 2006.2

Investors, however, were anything less than calm, pushing shares of Facebook to repeated all-time highs. The stock also was instrumental in lifting the Social Networking motif, where it has a 23.3% weighting. The motif has gained 15.8% in the past month. During that same period, the S&P 500 is up 3.8%.

Since the motif’s creation in September 2013, it has risen 18%. The S&P 500 has increased 10% in the same time frame.

That’s not to say that the deal didn’t elicit a cautious note for some. As Barron’s pointed out, the essential attraction of WhatsApp is its ability to allow consumers to bypass texting charges from mobile telecom carriers. Those message-heavy users tend to be younger, and as Evercore Capital analyst Ken Sena noted in Barron’s, Facebook’s growth has been slower among the key 18-to-24-year-old demographic.

For some, this was a must-deal for Facebook, which still has to worry about pesky little problems like how to retain users – and how to make them more financially valuable.

On the other hand, few investors seem to doubt the company’s talents in those areas at the present time.

1Reed Albergotti, “Facebook Profit Surges As Ad Sales Grow,” WSJ.com, Jan. 30, 2014.

2Tiernan Ray, “Aging Facebook’s $19 Billion Bid for a Fountain of Youth,” Barrons.com, Feb. 22, 2014.

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