Sometimes it pays to be dumb. Although I don’t encourage stupidity as a sound investment premise, but every once in a while you get some pretty interesting results by doing the exact opposite of what the so-called “smart money” suggests. This is where I’ve arrived with Facebook.
Despite what is perceived to be poor fundamentals, the social media giant has been one of the hottest stocks on the market over the past four months. Since reaching a 52-week low of $17.55 on September 4, the stock is up 74% to Wednesday’s close of $30.59. And there’s nothing standing in its way for further gains.
Remarkably, this surge occurred amid four lockup expiration periods. However, according to “smart money” that’s not how it’s supposed to work. Just before Christmas, roughly 156 million shares were presumed to flood the market – except these shares were never seen. The so-called "smart money" were once again proven wrong.
For those that are unfamiliar with IPOs and in particular lock-up expiration: as part of early standard start-up procedures, companies will typically issue millions of shares to (among others) employees, venture capitalists and mezzanine investors. As a way to prevent shares from flooding the market since these early shareholders will want to cash out, a “ban on selling,” or lock-up period was created.
However, not only are these early investors holding firmly onto the stock, new investors have begun to pile in. Clearly these are the smart ones. What they understand is that Facebook has 15% of the world’s population (1 billion people) using the service and that number grows each quarter.
What’s more, as evident by its Q3 report, during which the company posted $1.09 billion in advertising revenue, Facebook has now moved from “just hype” to hyper-growth. Facebook also reported 12 cents per share on revenues of $1.26 billion – exceeding consensus estimates of $1.22 billion.
The company’s better than expected performance was helped by significant improvements in various segments of its business, many of which are growing by double-digit averages. These include payment revenue, which soared 13% to $176 million. However, the most impressive aspect of the report was that 14% revenues (or $152.6 million) was generated from mobile.
What this means is that the company is successfully transitioning it business from a PC dependent model to the new age of mobility. And evidence that Facebook is gaining traction against Google in terms of advertisers. It also helps that Apple has integrated Facebook’s APP into its IOS.
Nonetheless, this story continues to be about execution. And there doesn’t appear to be anything standing in Facebook’s way to dominate this space into the future, especially considering that Research In Motion will soon unveil its BB10 phone.
What’s more, RIM also recently announced plans to sell a cheaper version of its BlackBerry Curve 9315 phones that will already come preloaded with Facebook. If BB10 and the cheaper phones are all that they are billed to be, this should bode well for Facebook. That Amazon is rumored to enter the smartphone market only makes things more interesting.
These are certainly encouraging signs for Facebook investors. Likewise, analysts have started to raise their estimates and have become more bullish on the company’s ability to compete with Google in ways that were once deemed impossible. The stock should reach $40 to $45 by the second half of this year. I was once called “dumb” for saying it will reach $30. However these days, portfolio returns have begun to call me other things.
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