Facebook Inc (NASDAQ:FB) shares haven’t impressed after a year or so on the market. It is, however, making important progress on the business front. Is this enough to make it a good long-term investment?
A Hot IPO
The cacophony leading up to Facebook’s initial public offering (IPO) was deafening. News about the IPO was everywhere. It wasn’t just a financial transaction, it was a social one. When the IPO turned into a debacle, the news was just as wide spread.
Indeed, Facebook Inc (NASDAQ:FB)’s shares didn’t do what everyone had grown to expect from a hot IPO. Instead of going up, they went down. A year later, the shares are still trading below their IPO price. It isn’t unrealistic for investors to wonder if Facebook is just another flash in the pan tech stock that’s destined to flame out as customers move on to other services.
Changes
While the company has yet to figure out how to monetize its customer base in a way that leads to big profits, it remains as relevant today as it did a year ago. It has also been working hard to find a way to make more money. Advertising has increased, the company is pushing hard in the mobile space, and it continues to attract new customers.
For example, daily active users increased 26% and monthly active users increased 23% year-over-year in the first quarter. Mobile monthly active users increased 54%. Over the year, the company launched a bevy of new advertising tool and saw ad revenues advance over 40% in the quarter, year-over-year. Mobile ads represented 30% of total ad revenue. The company earned almost a dime in the quarter.
A Long Way to Go
As impressive as those results are, they still lag behind LinkedIn Corp (NYSE:LNKD). The business-focused social network earned twice as much as Facebook Inc (NASDAQ:FB) on revenues of $325 million. Facebook’s top line was nearly $1.5 billion in the quarter. Clearly, LinkedIn has a much more profitable business.
The reason is that it has been able to generate revenue from its customers in ways that Facebook can only dream about. For example, in the first quarter 20% of revenue came from subscriptions, 57% from job search tools, and just 23% from advertising. Nearly 85% of Facebook’s revenue was from advertising. LinkedIn is far more diversified.
Valuation
The interesting thing is that LinkedIn Corp (NYSE:LNKD) trades at an unrealistic trailing P/E of over 400. Using a forward P/E, which is based on analyst estimates, brings the P/E into the still outlandish high double digits. Because Facebook Inc (NASDAQ:FB) lost money in two of the last four quarters, its trailing P/E is over 500. Its forward P/E, however, is more reasonable in the mid 30s.
With a stock price still below the IPO price, Facebook shares likely have more upside potential than LinkedIn shares. In fact, despite a recent pullback, LinkedIn Corp (NYSE:LNKD) is still up around 80% over the past year. LinkedIn is most appropriate for aggressive growth and momentum investors.
Wide Open Mobile
Yahoo! recently inked a billion dollar deal with photo focused social site Tumblr. While increasing its “audience” by more than 50% was a clear motivation for the deal, Tumblr’s mobile presence is more likely to be the big winner for Yahoo! once the purchase is consummated.
That’s true because no matter how large Yahoo’s online audience gets, Google Inc (NASDAQ:GOOG) still owns the Internet search and advertising businesses. Facebook Inc (NASDAQ:FB)’s search tool faces similarly difficult prospects. However, Google is facing more competition on the mobile front. So much so, that the company warned of margin compression in its most recent annual report.
With margins already tightening and a stock priced for perfection, Google Inc (NASDAQ:GOOG) investors should consider taking some money off the table. Yahoo’s efforts to get into the mobile space may give a nice boost to its turnaround efforts and could make it a buy for those seeking a turnaround story.
Facebook investors should take the Tumblr move as a positive because it speaks to the opportunity that Yahoo! sees in the mobile world. Note that Facebook owns the picture focused service Instagram. Facebook has just as much turnaround potential as Yahoo! if it can keep its mobile growth going.
Ugly Duckling
Facebook Inc (NASDAQ:FB)’s IPO has left it looking like an ugly duckling. But it is making strides in its efforts to monetize its sizable and still growing customer base. While its business isn’t as enticing as LinkedIn Corp (NYSE:LNKD)’s, it has just as much a chance to gain a foothold in the mobile advertising world as Yahoo! or Google. That could turn this duckling into a swan for more aggressive investors.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Facebook Inc (NASDAQ:FB), Google Inc (NASDAQ:GOOG), and LinkedIn Corp (NYSE:LNKD). The Motley Fool owns shares of Facebook, Google, and LinkedIn.
The article One-Year Later, Signs Of Progress originally appeared on Fool.com.
Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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