OMG – ‘Like’ What’s The Deal With This Stock?

In keeping with Monday’s Goldman Guide focusing on the millennial generation we thought it would be appropriate to discuss a high profile stock with these consumers in mind.  Deep down I do not think kids and young adults are any different today than any other generation, but on the surface these 20 and early 30 something’s seem to be the most ‘look at me’ people ever.  Like him or not, Mark Zuckerberg’s invention is one of the most innovative in history.

Facebook (NASDAQ – FB - $24.03) went public in late May of 2012 with shares spiking up to nearly $40 but then plummeting to $18.58 in early September just four months later.  At the time I was working for a prominent Wall Street bank as a broker.  To me, the initial buying was a classic case of investor bias in buying well-known companies and hype.  The massive sell off was due to the Street’s skepticism on how Facebook would make money and grow.

There is no doubt FB is a huge success, especially with younger consumers, a revolutionary idea and business.  The question is how the company will monetize this success, especially in mobile.  The quarterly revenue has remained fairly constant over the 4 quarters since the IPO, ranging from $1.1 to $1.6 billion.  Self-service and interactive ads remain the main source of income for the company.  This should be sustainable as long as the site remains popular.  Facebook credits and online games, like Farmville from Zynga (NASDAQ – ZNGA) are additional sources of revenue.  Estimates for 2013 are for $0.57 EPS and $0.77 for 2014 but we wonder whether that growth is optimistic without new revenue sources.

Look for FB to trade in a flattish range for the foreseeable future.  If and when the company creates new innovative ways to create revenue, use that catalyst as an entry point.

Like, have a great day.

Aaron Schweitzer

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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