Facebook Shares Buying Is Wise Only If It Replicates Google

Posted on Jan 17, 2014
By Gaurav Aidasani

 Facebook Incorporated has shown a tremendous growth in its market value as its share price roughly doubled. The company has shown an increase in the market value in a pretty short time as compared to any other large company.
In June, the stock of this social media biggie finished at $24.88 and it had the market value of over $60 billion. The third quarter ended with a share of $50.23 and the market value of this giant went up to a whopping $122 billion. The shares have shown a significant growth from here.

The Standard& Poor’s Indexes and S&P Capial IQ, conducted historical screens and it was discovered that only twice in a generation or in the history, has a company started off with a market value of at least $40 billion.
Yahoo Inc.  had doubled to more than $110 billion in the last few months of 1999, as an expectation that the company would be added to the S&P 500 served as an afterburner to the already break-neck speculative momentum in Internet stocks. In that same period, Oracle Corp. (ORCL) more than doubled in value off a similarly large base.

There are no other big companies which have achieved such a speedy growth. Companies like Apple Inc., Amazon.com, LinkedIn or Netflix Inc, which are giant corporations haven’t managed the same accelerated growth either.
What actually happened?

Well, people were highly skeptical if Facebook could really be able to command so much of users’ time and attention. And this attention was required, not just over the computers or laptops but majorly over mobile phones. Mark Zuckerberg, the founder of this social media website was not sure and hadn’t really persuaded Wall Street if he wanted to produce investor-friendly financial results in the near term. However, last year’s report showed enough evidence with a good grip on mobile ads and this put a stop to any more fears of whether Facebook could stay in the business or not.  

There were mechanical factors to be considered as well. The company has a relatively small amount of shares which are freely floating with founders and the investors control about 40%. The whole sector has been able to move forward with the help of money managers, who had an urgency to gain exposure to a relatively limited amount of social-media-stock supply.
Because the company has a room for rapid growth overseas and has a lot of room for more users, it is a much profitable company. This year, it is all set to earn about $2 billion on more than $7 billion in revenue. The top line looks for more than 40% growth from the previous year and an excess of 30% annually this year.

The Google experience
The size of Facebook and IPO experience, match perfectly. In 2004, when Google came out in public, it faced a lot of skeptical attitude towards its financial opportunities and valuations.

What to make of the fact that sentiment flipped so dramatically? Can such a change of heart by the market be taken as a reliable verdict? Being aggressively bullish on Facebook at its current price is implicitly a bet that it will replicate the growth and near-flawless strategic execution of Google Inc. (GOOG), the most successful, dominant, industry-defining company of the past decade. The consensus on Google ran something like this: A quirky management team running a company with a silly name that could easily be displaced by the next search engine, and one that used an odd electronic open-auction process to go public.

However, the stocks began to ascend quite impressively. It has grown to a pretty huge company in three years ‘time; it was much closer to what Facebook is forecast to become in its year three in 2014. In 2005 Google's shares had soared 135% to attain a valuation of $120 billion, just about what Facebook has today. The Google shares have been able to outperform the market always and currently, they trade around a robust $867.

However, for investors who bought Google after its outstanding performance in 2005, it wasn’t always a cake walk. The company saw a stock knockout where the shares fell as much as 18% in the first quarter that year before recovering. However, the stock saw a new rise later on.