FB Set to Join S&P 500, Shares Up

Zacks

Shares of Facebook Inc. (FB) jumped 5.0% ($2.45) to $51.83, after the Wall Street Journal reported that the social network provider will join Standard & Poor’s 500 index on Dec 20.

The Standard & Poor’s is a division of McGraw Hill Financial Inc. (MHFI). According to the S&P Dow Jones Indices, approximately $1.6 trillion were linked to the S&P 500 index at the end of 2012.

Year-to-date, Facebook’s share price has surged 83.5% compared with the S&P 500’s 25.1%. The inclusion of the company to the widely followed index is expected to further boost its share price in the near term.

Facebook will replace Teradyne (TER) in the S&P 500 and Williams (WMB) in the S&P 100. The company, which debuted on May 18, 2012, took approximately 17 months to join this prestigious index that represents the high-profile companies of the U.S. market.

The addition of Facebook is significant, as it reflects the growing popularity of consumer focused social-media providers in the U.S. Facebook’s IPO on May, 18, 2012 was spoiled by mismanagement and technical glitches that cost stock brokers and investors millions of dollars.

Although the stock debuted at $42.05, it closed the IPO day with a gain of only 23 cents. Facebook’s sky-high valuation, unproven monetization efforts on the mobile platform and a slow advertising growth rate were blamed for the modest gain. Following the debacle, the company’s share price plunged to a 52-week low of $17.55 on Sep 4, 2012.

The stock took almost 14 months (Jul 31, 2013) to cross the psychological barrier of $38.00, the high end of its IPO price range. Since then the stock has surged primarily based on back-to-back strong quarterly results driven by Facebook’s improving focus on user engagement and mobile monetization.

In the recently concluded third quarter, mobile comprised 49.0% of ad revenues, up from 41.0% in the previous quarter. The sequential increase in mobile ad revenues was driven by an increase in average price per mobile ad, number of mobile users and ads shown per mobile user.

To boost Facebook usage among teenagers, the company decided to allow users in the age group of 13 to 17 to make public posts, which is a positive. The company also announced that it will restrict ad quantity in newsfeed in order to improve user engagement.

We believe that the company has gained significant traction in its mobile ad business within a very short span of time. This, combined with its massive user base and its ability to track personal details over time, makes it a formidable force in the online ad market.

Moreover, the new products such as the Reader and television-like spot offerings for advertisers are expected to drive top-line growth, going forward. However, higher investments to expand mobile offerings and increasing competition are expected to hurt margins in the near term.

Currently, Facebook has a Zacks Rank #2 (Buy).

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