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Social Media Stocks – Facebook at over $60, Acquires WhatsApp for $19B. Where is it heading?

Facebook Buys Whatsapp

Investors are continuing to invest into technology stocks this year, hoping there’s more left in a sector that enjoyed strong gains alongside a broad equity market rally last year.

The past months have brought quite a few developments for social media stocks. Facebook, Twitter, LinkedIn and Yelp! announced their results for the fourth quarter of 2013. Whilst Twitter and LinkedIn stocks plunged during the trading session following the announcement, Facebook and Yelp reached all-time highs.

Yelp! had an impressive performance of over 310% in the last 12 months, however possibly one of the most interesting Social Media stocks at the moment is Facebook. Facebook has recently celebrated its 10th birthday and it did so by blowing past Wall Street estimates. Only 7 months ago Facebookhad not performed as well as investors hoped but today it’s one of the fastest rising stocks on the market. The stock has risen from $26.51 last July 24th to over $65 (as at 13th February 2014), an increase over 143%.

The change of direction for the Facebook stock was sparked by a third quarter earnings report in late July that revealed the company’s growing mobile advertising presence. In fourth quarter earnings, Facebook reported that although the number of adverts delivered fell 8% from the year-ago period, the average price per advert rose 92% in the same period. Facebook’s CEO, Mark Zuckerberg has specified that the company wants to place an emphasis on advertising quality, rather than quantity.

Now that Facebook stock has doubled, Investors are now asking, what is in store for Facebook stock, can it continue to rise and is this sustainable?

Analysts believe that Facebook is expected to gradually increase advertising on Instagram and view it as a major driver for new growth. Instagram doubled its user base last year.

Facebook has so far effectively addressed one of the most significant issues from its IPO days the lack of revenue from mobile devices and has now embraced mobile as being an integral part of its business model. Facebook’s latest newsfeed adverts are injected directly into a user’s stream of news and content, are ideally suited for mobile screens. The company is continuing to seek growth from video advertising, a new feature that is just starting to be rolled out on the platform and that has the potential to be very popular with advertisers.

The Facebook Price to earnings ratio suggests that the stock is overvalued as it is currently trading at 107 times its earnings. However technology stocks are well known for their high valuations as investors continue to expect higher earnings growth in the future. The question is, can Facebook sustain the growth it has achieved so far and continue to increase profit at a fast enough pace that meets or surpasses Wall Street’s expectations?

So far, Facebook showed investors that it is able to turn revenue into profits whilst on the other hand, Twitter and LinkedIn are still struggling to increase their profitability and Google+ is in the shadows. Therefore in my opinion, in the social media arena, Facebook has the most potential in terms of profitability and in the short term I think that the company can continue to deliver.

In the long term though, the company will have to continue to re-invent itself and prove to investors that it can continue increase profitability whilst keeping its users happy. The company is sitting on $11.45 billion in cash and therefore can afford to experiment.

Facebook’s success also depends on whether it can continue to acquire the right companies to achieve its mission. Facebook bought Instagram for $1 billion in 2012 and bid $3 billion to buy Snapchat in 2013, an offer which was declined by Snapchat. In the meantime it has just announced that it has acquired WhatsApp for a shocking $19 billion worth of cash and stock. Facebook said that it does not intend to introduce advertising on WhatsApp like it did with Instagram and is instead investing in growth.

Monetisation is important to investors, but Facebook CEO has said that this is not priority and that when the time does come to monetise aggressively, it will not be through advertising. According to Zuckerberg the explicit strategy for the next years is to focus on connecting everyone in the world. “Currently, WhatsApp has a strong presence internationally with 450 million monthly users, but it’s a fragmented market with many competitors. Outpacing them right now is critical. Once we get to being a service with 1 billion, 2 billion, 3 billion people, there are many clear ways that we can monetise.” It will be interesting to see how the market reacts to this news in the coming weeks.

Google recently outmanoeuvred Facebook in acquiring an artificial intelligence company, DeepMind Technologies, for a reported $500 million.

Facebook is interested in artificial intelligence because over the next 5 years, it wants to become more intuitive and to solve problems that in some cases users don’t even know they have. Between 5% and 10% of Facebook posts involve questions such as a request for a good restaurant. By adopting this vision, Facebook is heading towards Google, which is one of the few companies with the cash and knowledge to outsmart anyone trying to compete on search.

 

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