Facebook Inc (FB) Dismantles the Bear Thesis

Wait, what was that Mark? It’s hard to hear you over the cracking sound in my thesis.

So why are teens sticking to the service? It’s the network effect. Even with the proliferation of new social networks, Facebook is probably the only place with all of your friends. That’s a pretty compelling reason to stay even if you don’t like the service

Jim Edwards at Business Insider had a great analogy to describe this. Facebook is for teens what cable TV companies are for adults: No one likes them but everyone uses them.

It’s cheap

My final problem with Facebook was valuation. There has always been concern that Facebook went public too late in its lifecycle. Decelerating growth would result in multiple contraction limiting investor upside.

But while the stock is trading at a lofty 40 times forward earnings, there’re several catalysts that could cause that multiple to grow. Short-term, expect a rush of analyst upgrades as everyone revisits their assumptions. Over the next eight to twelve quarters, Facebook will be running into a series of easy comparables. Expect rapid mobile gains to result in earnings growth acceleration. That spells my favorite two words in the English language: multiple expansion!

Down goes another premise.

Foolish bottom line

Facebook has a host of problems. The company faces enormous competition from hundreds of competitors – chiefly Twitter, Google, and Yahoo! Inc. (NASDAQ:YHOO) – for customer eyeballs and business ad dollars. Attracting the next billion users to the network will be challenging. Investors should still be skeptical of the company’s corporate governance with Zuckerburg owning over 50% of shares. All of these issues remain. Regardless, this quarter dismantled the three biggest pillars in my bear thesis.

Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Facebook Dismantles the Bear Thesis originally appeared on Fool.com is written by Robert Baillieul.

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