Is this the time to long Face book (FB)?

Since its IPO from May, Facebook almost dropped half of its IPO price. Lots of investors have the same question, is this the right time to long Facebook? Facebook is actually showing a recovering trend since its second quarter report comes out. Google plunged on Oct, 18^th because of lousy numbers and it impacts FB as well, whose stock dropped more than 4.5%. After Facebook reported its third quarter report, which beat the consensus, Facebook surged to $24 then fall back to $22.

The company owns the biggest social networking in the world. Recently, Facebook has reached 1 billion users and 900 million monthly active users. The three types of Facebook customers are users, developers and advertisers. Users use the Facebook to communicate with their friends, family and share the daily news around them. The developers, who develop applications on the Facebook platform, reach the huge users base. The advertisers use Facebook to reach their potential customers based on different age, sex, geographic locations, race and so on.

Facebook generates revenue mainly from the advertising and payments & other fees. Advertising includes displaying any products on the Facebook website, mobile application, and any other third party affiliated website. Surprisingly, Mobile ad sales accounted for 14% of advertising revenue in the third quarter report, which is a key increase in the third quarter. The mobile Facebook page is very important for the next business cycle since recently the technology trend is focusing more on the mobile instead the PC because of the portability. Twitter, which is a main competitor of Facebook, has the advantage that you could use it any time. To address the concern for the increasing competition from Twitter, Facebook develop their mobile version of the application. This is very important because otherwise Facebook will lose a huge portion of active monthly users. People might not use computer everyday but they definitely use cell phone every day.

 

	Three Months Ended September 30,			Nine Months Ended September 30,
millions	2012	2011	%  change	2012	2011	%  change
R&D	$244	108	126%	1102	264	317%
Percentage of revenue	19%	11%		31%	10%

 

We could tell from the chart above that Facebook has dramatically increased its investment in R&D. That is part of the reason why Facebook reports a GAAP 0.02 loss for EPS. This number is dramatically high compared to last year because Facebook focus on the mobile page development, which would help Facebook in the future.

Also, Facebook records a really high tax provision this year due to the non-deductible compensation expense outside US, which would lead a higher tax cost this year. Zynga, a game developing company, is a key customer for Facebook and consisted of 7%, 9% of total revenue for the third quarter and the first nine months of total revenue, decreased from 12% in 2011.

Facebook is in the Computer Service industry and there is not a similar competitor in the market. Renren, the biggest social networking company in China, has no advantage at the non China region. It is hard to image that Facebook and Renren compete with each other in the near future because of the different market target locations. Twitter seems a really good template for Facebook. Unfortunately, Twitter is not public traded. LinkedIn, which operates the biggest professional network, is also slightly different from Facebook. Though a lot of computer service industry companies generate revenue from advertising, they have different end customers and products. Facebook doesn’t have a strong competitor in social networking.

By Ford Kong