It wasn't so long ago that Facebook Inc. (Nasdaq:FB) was a Wall Street pinata, but the shares found their footing in November and have risen roughly 50% since then. While the company's fourth quarter results do show the impressive growth potential in the business, there are still significant questions left unanswered as to whether the company can better monetize its user base, while maintaining that delicate balance with customer service. Given the wide spread in analyst estimates, it seems likely that Facebook is going to remain an interesting and volatile story for a while yet.

Top Investment Trends For 2013: We go over a few investment trends for you to think about for 2013.

Good Growth in the Fourth Quarter, but not a Perfect Quarter
Facebook reported 40% revenue growth for the fourth quarter, a bit ahead of the average estimate. Even so, ad revenue came in a little disappointing. Ad revenue was up about 41% (the same constant currency growth rate as in the third quarter) and a few percentage points shy of expectations. While the company's 46% growth in impressions seemed fine, ad pricing dropped about 4%. At least some of this decline appears due to lower minimum threshold bids in emerging markets, but it is the first reported decline and looks like the main source of weakness.

Facebook is still at a stage where most sell-side analysts (and, presumably, many investors) don't worry all that much about profits and profitability. Even so, gross margin weakened on a year-on-year basis, while GAAP operating income declined 5%. Non-GAAP operating income increased 18%.

Mobile Still Coming Along
Mobile is the dominant topic these days for any ad-based business model, and Facebook showed progress here as well. The active mobile user count increased 12% sequentially, while mobile ad revenue rose about 135% sequentially and now makes up close to one-quarter of the company's ad revenue.

Will Graph Search Be the Next Big Thing, or Just an Incremental Improvement?
Facebook's new Graph Search has gotten ample attention (as with almost anything Facebook does), but it's going to take quite a while to see how much difference this approach really makes. Combining the company's marketing database with Internet search sounds potentially powerful, but I'm not sure there's really going to be a large amount of utility for the user. I could see how this service/feature could offer some incremental benefits over what Yelp Inc. (NYSE:YELP) or Angie's List Inc. (Nasdaq:ANGI) (assuming you share your friends' tastes), but I don't see how this really dents Google Inc. (Nasdaq:GOOG).

SEE: Good For Facebook, Bad For Google And Apple

A Long-Term Plan, or Trial and Error?
One of my long-term concerns on Facebook is the extent to which the company really is operating with a long-term playbook or simply coming up with ideas on the fly and trying them out. In fact, I'll go so far as to say that I've sometimes wondered whether Facebook's plan is to rely on customer outrage as a default to shape its decisions, as the company has made several blunders (changing contact emails, changing Instagram policies, cracking down on pictures of users' children, and so on) that riled up the user base. Likewise, did any user ever say "what I really need is a way to use Facebook to send money or gifts to my friends, because gift cards, email, snail mail, et al just don't get the job done"?

Whereas Google, Amazon.com Inc. (Nasdaq:AMZN), Apple Inc. (Nasdaq:AAPL) all seem quite adept at anticipating customer needs, Facebook sometimes seems to follow a policy of "let's see what happens when we try this." Certainly it hasn't pushed users off the service in any real numbers, but it does add unpredictability to the model and stock.

The Bottom Line
There's still a wide range of opinions on what Facebook is going to become as it grows up. While that's not surprising, it does add volatility - multiple academic studies have shown a strong correlation between stock volatility and the size of the spread between the high and low analyst estimates. With the high and low revenue estimates varying by over 40% for 2014, I expect the trading on these shares to be pretty wild.

Taking a middle path, Facebook could well deliver long-term revenue growth of 20% and free cash flow (FCF) growth of 40% from 2012 levels. At those growth rates, the shares look fairly valued. Remember that wide spread on estimates, however - investors who believe they have a strong case for better (or worse) performance are likely to see a significant corresponding amount of under- (or over) valuation in these shares today. Consequently, I don't believe anybody should own these shares if they cannot accept 5-10% daily moves or 25%-plus quarterly moves with equanimity.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Investing

    The Rise of Corporate Venture Capital

    After the success of Google Ventures, corporate venture capital is an increasingly popular diversification and hedging tool for many large corporations.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Investing

    What’s Plaguing Twitter and Yelp?

    Yelp and Twitter have recently become grounded in reality and unable to justify their sky-high stock valuations.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!