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Believe the hype: Why Facebook’s valuation justifies price

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Facebook (FB) demolished earnings expectations last night, thanks to a large jump in mobile advertising. To wit, Facebook Q1 EPS beat expectations by a dime, earning 34 cents per share as it gained 43% more daily mobile users in the process. So what does this mean for the Facebook trade and social media stocks in general?

Drilling down a little deeper, Sun Trust analyst Bob Peck noted some key metrics to keep in mind concerning Facebook’s most recent quarter:

  • Daily active users trending higher over monthly active users, "which is a great thing."
  • Mobile revenues up sequentially
  • Ad revenues accelerated 82% since Q1 2013
  • Costs – COGS improved year-over-year by nearly 1000 bps

 

The big issue though for Facebook going forward in Peck’s mind is expectations. “Comps get harder from here,” basically implying Facebook’s strong Q2 from 2013 will be the baseline when Facebook reports next quarter, which means Wall Street expectations will be much higher.

Simon Baker of Baker Ave Asset Management is still bullish on Facebook and select social media stocks, despite the expectations issue.

“It’s expensive but it is a growth story, ad sales jumping in the last quarter - this is a massive story going forward, “ he says. “I thing the valuation justifies the price of it. Going forward you want to be long this as one of your core Internet, ‘social media’ stories.”

As for the other social media stocks, they’re mostly down but in Baker’s mind it’s time to get back in, but be selective. Specifically Baker believes Opentable is a short here, but Yelp (YELP) is the premier choice for investors looking to buy in the restaurant review space. Baker also advises nibbling on Linkedin (LNKD) on the dips.

Are you buying Facebook here and other select social media stocks? Let us know in the comments section below, on our Facebook page or via Twitter.

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