Is Facebook a Buy After All?

Facebook (NASDAQ:FB) shares gained nearly 20 percent on Wednesday in the first full day of trading after the social giant announced encouraging quarterly results, beating Wall Street’s expectations and reporting a 32 percent spike in revenue. Before this latest earnings report, Facebook shares were trading at roughly half their IPO price of $38. When the market closed on Wednesday, they were trading at $23.23, then rounded out the trading week to finish at $21.94 and clearing the stock priced in the teens prior to earnings release.

Is this a sign that Facebook has rounded the corner? Perhaps — but even if earnings had simply met Wall Street’s targets, as they did in the company’s first post-IPO quarterly report, they should not have been trading as low as they were, according to Motley Fool’s Rick Aristotle Munarriz.

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“Google’s (NASDAQ:GOOG) disappointing report last week weighed on shares of Facebook and Baidu (NASDAQ:BIDU),” said Munarriz, but “the connection didn’t make any sense, especially since Google was hitting new highs earlier this month as Facebook and Baidu were struggling.”

The 15 percent drop in Google’s average cost-per-click, which has been stubborn for several quarters now, may have played a role in feeding concerns over Facebook’s own attempts at monetization, which relied heavily on advertising, particularly on building up mobile ad revenues.

But concerns that Google’s slowing ad growth could indicate the same for Facebook were largely unwarranted or, at the very least, overblown. Google has been in the game for a while, whereas Facebook is only just starting to monetize its massive traffic. In fact, Facebook has actually been getting advertisers to pay more to generate leads on its website, as evidenced by the company’s 38 percent growth in ad revenue.

Facebook’s drop last week after Google reported disappointing results put the social networking giant well below where it probably should have been trading, but investors’ caution can be forgiven — after all, Facebook doesn’t have the best track record. And the company still has a long way to go before it justifies its $38-per-share IPO, which valued it at $104 billion back in May.

However, it’s important that investors grant credit where credit is due instead of harping on about how the IPO was over-priced, which was, in the end, the main reason for the dramatic sell-off — more so than anything the company has done, or failed to do, since.

Facebook reported adjusted profit of $311 million on nearly $1.3 billion in revenue in the three months through September. That’s a nearly 25 percent net profit margin. And the company is only just getting started.

One of the most encouraging aspects of Tuesday’s report was the company’s mobile outlook. Though mobile ad revenue only made up 14 percent of total ad revenue for the quarter, that will likely change. Sixty percent of Facebook’s one billion monthly active users are now accessing the social network via mobile applications, and you can be sure CEO Mark Zuckerberg isn’t letting that knowledge fall on deaf ears.

“I think our opportunity on mobile is the most misunderstood aspect of Facebook today,” Zuckerberg said during the earnings call. “I believe that over the long run we’re going to see more monetization per time spent on mobile than on desktop.”

It’s a lofty goal, to be sure, but the company is already taking in $50 million in monthly revenue from mobile advertising, and that’s after less than a year after it first began attempting to monetize its various mobile platforms.

Sterne Agee analyst Arvind Bhatia said in a note to investors that Facebook’s mobile advertising rates far outstripped expectations, thanks in part to its integration into Apple’s (NASDAQ:AAPL) iOS 6, which he said dramatically increased engagement on the mobile platform. And Apple’s new operating system only launched in mid-September, barely more than a week before the end of the quarter. Results for the three months through December will give a more accurate picture of how Facebook’s relationship with Apple will impact mobile interaction and, consequently, ad revenues.

Bhatia wasn’t alone in his praise — several analysts upgraded Facebook’s stock on Wednesday, adding to its upward momentum. Citigroup, Stifel Nicolaus, and Bank of America all boosted their ratings to a “buy” from previous “neutral” or “hold” positions. And that’s despite Facebook reporting a 30 percent decline in operating margin, as well as a GAAP net loss of $59 million, or $0.02 per share.

With mobile traffic up 61 percent in the year, and Facebook quickly increasing mobile ad revenue, analysts and investors are looking forward to a brighter future more than they are responding to current profits. Despite its size and age, Facebook still has the potential for rapid and exponential growth, the kind that more established companies like Google have moved beyond.

So is Facebook a buy after all? The answer to that question, at Friday’s price of $21.94, would seem to be a resounding “yes”.

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