For me, this investment is about reach. Facebook has about 900 million global users and they have a big opportunity to monetize that user base over time. My estimation is that they are monetizing the average user right now at just pennies on the dollar.
But this is a long-term play on advertising. Facebook has the most information about individuals than almost any other company in the world. That is a huge advantage going forward. I bought the stock initially when it dipped, sold after it recovered somewhat, then added to my position in July.
I think that the stock has put in its bottom at around the $25 area. When you look at it fundamentally, it's not a stock that's out of control based on a forward PE of about 50 times. There is a big opportunity to increase profit substantially over the next four quarters.
A good example is what Facebook is planning to do with job boards. The company will reportedly launch its own later this summer. I think that's one of the things that will start bringing up the earnings and cash numbers.
We have worked on Facebook for quite some time and awaited the IPO with a secret hope that it would decline. And so it did, and we took an initial position post-swoon. We then went back and added a bit more.
Here are a few reasons:
- Facebook has certainly become the dominant platform for social sharing in the consumer segment. This simple fact means that many related services will end up being built on Facebook, one way or another. Their platform is their main advantage.
- We’re in the early stages of understanding how to leverage social information to provide better search results, ideas, content and interaction. As Clay Shirky says, “it’s not information overload, it’s filter failure” - and our view is that the social network will provide the ultimate filter for 90% of internet users.
- The business model is very attractive. The company has admitted to being challenged in increasing monetization, especially in mobile, but they are generating substantial growth and high cash flow margins.
- The valuation is attractive. Our intrinsic value estimate for 2012 is $50 and for 2013 it is $60.
- We recognize that the company will have to execute and acquisitions are likely to occur, but so far we are willing to give the management team the benefit of the doubt. Like most investors, we will be watching their next moves carefully.
Douglas Estadt made an initial purchase of Facebook on its IPO date, then accumulated more than twice that amount of shares between May 2 - June 6.