Facebook Inc (FB) Is No Fluke

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July 25, 2014 11:58am NASDAQ:SOCL

facebookBrad Hoppmann: Facebook Inc (NASDAQ:FB) is no fluke. Mark Zuckerberg’s crazy idea is killing old media, earning billions, and just getting started. What’s not to “like?“

Everything about Facebook’s (FB) second quarter was huge. Revenue, profits, profit margins, users, growth, you name it — very few companies post these numbers barely two years after going public.

Will FB stumble eventually? Yes, but Zuckerberg is 30 years old. He has all the time in the world.

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About six months ago, I wrote an afternoon edition called Facebook Cracks the Code to Your Eyeballs. The occasion was Facebook’s fourth quarter 2013 earnings report. Here’s a quote from that issue on Jan. 30, 2014:

Facebook shares climbed an astonishing +14.1% today. The original social network proved doubters wrong with last night’s earnings report.

The bullish reaction boiled down to one thing: mobile advertising. Facebook said more than half of the last quarter’s revenue came from advertising on mobile devices.

Why is this a big deal? The entire media industry has been wrestling with smartphones and tablets ever since the first iPhone launch in 2007.

Industry leaders immediately saw the potential for location-specific advertising. In practice, however, no one could solve all the technical and business challenges until now.

Last quarter, Facebook finally cracked the code. Their latest techniques like “sponsored posts“ are visible enough to get the response advertisers want, but not so intrusive that they suppress usage.

Facebook shares closed at $61.08 that day. In hindsight, I should have suggested buying the stock with both hands. FB ended at $74.98 today and set a new $76.74 all-time record high.

Everything I said about Facebook back then still applies today. They truly have cracked the code and advertising will never be the same.

Revenue surged 61% in this year’s second quarter to $2.91 billion, up from $1.81 billion a year earlier.

Even more stunning: Wireless devices accounted for 62% of Facebook’s ad sales last quarter. Those tiny little screens no one can read turned out to be more efficient than desktop computers — at least according to ad buyers.

Mobile ad sales were almost zero when Facebook went public in May 2012. At this rate, they will be at $1 billion a month before we get to 2015.

How does Facebook do it? You already know if you ever use their app on a mobile device. You see a never-ending stream of baby pictures, funny cats, and interesting news, all nicely arranged into little boxes.

Every so often, one of those boxes is “sponsored“ by a business. Most of the time, we scroll right by… but enough of us stop and click to make the ads cost-effective. Companies keep buying them.

Notice something else about the ads. Usually you have some kind of connection with the company or product. Facebooks knows your friends, your interests, and your preferences. It tries to show you ads that you won’t find annoying. (And it lets you tell Facebook if you do find them annoying.)

Advertisers “like“ Facebook and other online promotions because they get instant feedback. Either people click or they don’t. Either people buy or they don’t.

Facebook works because it has balance. The ads aren’t intrusive. Quite the contrary; the ads arerelevant to users. That’s why they work.

Nothing in life is free, even Facebook. You get funny cat photos and give up some of your privacy in return. Facebook has a dark side — but so do newspapers, TV networks and theme parks. Bad things happen in all those places.

A virtual “place“ is exactly what Facebook has become. It is where people gather to talk and share. Far-flung families can stay connected in ways that were once impossible.

In the last week, Facebook was the global platform for mourning and remembering the Flight MH17 victims. We all wish the tragedy hadn’t happened — but it did, and Facebook helped people cope.

This is why Facebook isn’t going away. More than a social network, it is now the world’s social glue.

When you include affiliates Instagram, Messenger and WhatsApp, Facebook now has 2.2 billion monthly active users. That number doubled in the last year, and now includes one-third of all living humans.

With this kind of scale, it is very hard for Facebook not to make money.

If Facebook management can keep the right balance between advertising and usability, the stock may just be getting started.

Am I saying to buy FB stock now? No — but you ought to keep your eyes on it. Just like I said aboutApple (AAPL) yesterday, Facebook tells us a lot about the markets and the future. Wise investors will watch closely.

brad hoppmanThis article is brought to you courtesy of Brad Hoppmann

Uncommon Wisdom Daily is a free daily investment newsletter published by Weiss Research, Inc. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. We cannot guarantee the accuracy of third party advertisements or sponsors, and these ads do not necessarily express the viewpoints of Uncommon Wisdom Daily or its editors.

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