When Facebook went public last year, it's starting price was $38. It hit $45 on the day of its IPO in May of last year, but that number quickly dropped. Today, the stock price broke its record of $45 and things seem to be looking up for Facebook. Last September, the price hit its lowest point at $17.55, but now, almost exactly a year later, the price hit a high point of $45.09 and closed the day at $45.03.
So why is Facebook successful now when it was doing so poorly before? This article suggests that speculation about the company's possible expansion into China could play a part. Facebook's advertising is also a factor. The company has recently been successful in its mobile ads, which pull in 41% of its advertising revenue. Instagram, owned by Facebook, is also expected to have ads soon. In this article, analyst Arvind Bhatia says that "video advertising and Instagram" are "catalysts for the stock."
Why do you think Facebook is doing more successful now? Do you think the stock price will continue to rise, stay the same, or fall down again?
CNN
7 comments:
Right now I think that the stock's short term success can mainly be attributed to inflated investor confidence, and I don't think at all that there is a single reason, fundamentally speaking, to own this stock. Most investors probably know this and are just riding the Castle in the Air to make a quick buck. From a fundamental perspective, this is a company that shouldn't even be touched. Facebook, with a pretty ridiculous market cap of roughly $110 billion, is valued as highly as established companies like Caterpillar ($56 billion) and Starbucks ($56 billion) combined. This wouldn't be a problem if revenues, cash flows, and earnings could justify such a fat market cap, but they could hardly even justify a $30 billion valuation. Anyway, all I'm trying to say is that the the company's fundamentals aren't responsible for pushing the stock higher. If anything is carrying this stock, it's news.
Investors can't find a reasonable valuation in Facebook's earnings, so all they have to go off of is news and market trends. I think that Yahoo's recent social media buying spree may be partially responsible for lifting up FB, sending a message to the market that social media is still kicking and there is money to be made. Also, monetizing mobile is an important aspect of Facebook's business, and investors I'm sure are happy to hear that mobile isn't just popular, but also profitable. Those are some of the more obvious aspects that could have stirred investor confidence.
At this point, I can see the stock going either direction. Upward: Twitter just filed with the SEC for its IPO. This is a good sign for social media, and shows that these aren't just little teenage startups, but full-grown, public companies. If the IPO goes well and restores investor confidence in regard to social, we may see that confidence reciprocated to FB. Downward: Nearly half of the company's outstanding shares are owned by institutions (i.e. investment banks), and if they decide to cash out, probably within a very short time frame due to the speculative nature of the stock, then we'd see some serious downward pressure. Then there's also the chance that someone like Dave Einhorn or some other influential fund manager takes a large short position (basically betting that the stock price will fall), which would crush investor confidence. This is more likely to happen as the valuation gets steeper.
Personally, I think Facebook is just another ridiculous example of some crazily overyhyped tech company with very limited upside potential and lots of downside. In the short term, the catalysts that Bhatia points out may help push the stock up a few points here and there, but past that I don't see a reason to own the stock in the long run.
Thank you Quinn for your amazing input!
I'm interested to see how social media continues to perform in the market, especially Twitter, which I don't see performing too well, but we'll see.
Please nobody else be scared off by Quinn's great analysis.
I am a bit intimidated but I will comment nonetheless. It is clear that the value of stock is constantly impacted by variations in the stock market and the business decisions that a company makes. Apart from that, though, there is a consistent correlation between the value of the stock and the social atmosphere of this situation. With the increasing prevalence of social media in our everyday lives, the power of the advertising on the sites increases directly. If a social media site can learn how to advertise effectively, it can exponentially expand it's gains from the advertising done directly on the site. As long as social applications such as Facebook, Instagram, and Twitter remain a popular trend, the sites will undoubtedly have the advantage of those ads to boost the value of the company and the stocks.
Quin's a g... That needed to be said.
Firstly, I'd like to concur with Joey in saying that Quinn is indeed an absolute G and an experienced follower of the markets.
In response to Quinn's comment though, I agree with Nicole that, despite its high (and maybe undeservedly so) valuation with regards to its revenue, I think many investors find that being able to reach 1.15 billion monthly active users instantly is still a very exciting prospect, regardless of revenue. And not only does Facebook have so many active users now, but it still has tremendous potential for growth, if you count the many people in developing countries who have yet to access the internet. Very few, if any, other companies in the world can tout these as facts. Additionally, Facebook's Q2 revenue did top Wall Street projections, coming out at $1.8 billion instead of the expected $1.6 billion, and this may have been a large reason behind the recent surge in its stock.
Unfortunately, with the prevalence of fast trading nowadays, not many people believe in the buy-and-hold doctrine that Quinn believes in. Indeed, when Facebook stocks first hit the market, many investors were doubtful about the sustainability of Facebook's business model, and thus a decrease in the stock price followed. However, it does seem that people are in to make a quick buck after the first sign of good news drives investor confidence up.
But in essence, this is what the market is, isn't it? It's not necessarily a reflection of actual company performances but rather of the mood of investors, which may be driven by hype/news or by actual company fundamentals. Right now, investors are feeling confident (whether it's justifiably so, maybe not) about social media, and so they're buying. This, in turn, is driving the stock up. Also, as the old saying goes, "buy on the rumor, sell on the news." Investors might be buying in anticipation of Q3 earnings to be reported next month, and with the news may come a sell-off and a drop in the stock price. But, we'll see.
Also, I'm not too sure about Facebook expanding into China, considering the fact that the only thing close to social media in China is still the state-run, state-monitored, and state-censored Weibo. Last time I checked, the Chinese government didn't like uncensored social media. Or did I miss something big recently?
I think that Facebook's stock growth is unsustainable. The stock is overextended and volatile with such recent steep growth after a long period of little to no growth, and the stock will most likely reverse to the mean over time, and therefore decline.
Regarding Patrick's question, there has been no real news regarding a possible unban of Facebook in China. Facebook COO Sandberg visited China last Tuesday to promote her book, and in relation, change, although in her presentation she made no mention of censorship or Facebook. In addition, the Twitter-Facebook hybrid Weibo dominates the China social media market, in use by 30% of worldwide Internet users. There are also IM services such as QQ and WeChat. I feel even if Facebook is eventually able to expand into China, it is unlikely to experience large amounts of growth.
Well I think one of the reasons why Facebook's stock has been dramatically increasing is the investor confidence in the stock.
We tend to think of Facebook in terms of its usage and popularity amongst ourselves. While both are essential to the success of both the company and its stock, it ignores the principal drive behind investor confidence - revenue and promise of revenue.
The tech company raked in over $5 billion in 2012 establishing its power to generate revenue. In terms of promise of revenue, Facebook is poised to launch a powerful new advertisement tool - video ads. http://www.reuters.com/article/2013/09/12/us-facebook-video-idUSBRE98B17020130912
For a 15 second video will cost an advertiser $1-2.4 million dollars. I don't know the other terms of this estimate, but the potential for massive revenue is there. Companies want these eye-catching, albeit annoying, ads, and will purchase them. Meanwhile, Facebook profits grow massively and investors are happy.
In the long term, massive growth is unsustainable and Facebook will eventually decline as virtually all tech companies do. However, it is poised to surge as revenue and future revenue show no short-term signs of even leveling out. It is still a very popular social media site and will remain that way until the next wave of change arrives.
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