As easy as it is for investors sitting on the sidelines to write off Facebook's (NASDAQ: FB) massive post-earnings run-up as a missed opportunity, it could ultimately prove to be the wrong decision. Last week, I found Facebook's long-term growth story to be so compelling that I went ahead and bought shares at around US$50.
FB data by YCharts.
Turning threats into opportunities
The tell tale sign that Facebook wasn't going to become the next MySpace was how it dealt with the "threat" of mobile. Last year, Wall Street was overly concerned that the explosive rise of mobile users would likely cannibalise Facebook's desktop-oriented business model. It wasn't until last quarter that the company officially put this concern to bed by showing the skeptics that its business is incredibly adaptable to change, despite its massive size.
Source: SEC filings.
The fact that 41% Facebook's advertising revenue came from mobile last quarter when it was non-existent less than two years ago should give investors the confidence that Facebook is capable of reacting to and anticipating changes in technology and user behaviour in short order. At the end of the day, adaptability is an essential quality for any technology company to posses, given the notoriously disruptive nature of technology in general.
The deal sealer
When you've got 699 million users engaging on the site every single day, the growth opportunities are seemingly limitless. Let's name a few.
The company is reportedly gearing up to launch video ads within the News Feed, which, if all goes to plan, could equate to several billion in additional annual revenue. Additionally, there's massive potential for Facebook to leverage its existing user base in more creative ways than simply serving out more advertisements. I could easily see it entering the mobile payments business or perhaps even creating a commerce platform where the user becomes the customer.
The moral of the story is that Facebook will most certainly introduce more creative ways to monetize its ecosystem in the years ahead. Coupled with the fact that it's becoming more experienced with unlocking user insights and measuring ad effectiveness, it's all but certain that marketer interest will remain strong in the years to come.
Don't let the numbers scare you
Behind its seemingly "stretched" valuation lies a business that's incredibly dynamic and led by perhaps the best CEO in the business. With a 99% approval rating on Glassdoor (and currently ranked the highest-rated CEO), Mark Zuckerberg has created a culture that its employees are openly embracing. With such great rapport among employees, it should come as no surprise that Facebook is also ranked the best place to work on Glassdoor.
As often is the case with amazing businesses, Facebook is expensive by conventional valuation metrics. Shares currently trade for 229 times trailing-12-month earnings and nearly 52 times forward earnings. What's more, the analyst consensus expects some pretty serious revenue growth in the years ahead. The consensus is that it will grow 2013 revenue by nearly 45% from 2012 levels, and by 2014, it is expected to rise by another 33% from 2013 levels. From this perspective, a lot of growth could already be baked into Facebook's current share price.
However, if you were to follow the numbers alone, you could end up missing the bigger picture: Facebook isn't a conventional business, and shouldn't be valued as one. Over the next decade, I expect investors to slowly realise how the facets of its business all play into the bigger picture. If everything goes well, Facebook has a good chance of becoming the greatest communications company the world has ever seen. With the right mindset and appropriate time horizon, you haven't missed the boat yet.
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A version of this article, written by Steve Heller, originally appeared on fool.com.
