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Technology

Facebook Is Rallying On A Rough Road

Facebook-Insider HedgeFacebook (NASDAQ: FB) stock is on the rebound and investors are already raising their expectations on the social media company. Facebook has gained 56 percent since trading at an all time low of $17.55 in September. The company is now down 27 percent from its IPO price of $38 per share, which is a significant recovery from the 50 percent drop.

The company’s recovery has raised numerous questions, especially, given the circumstances under which, the rally coincides with. Actually, few would have predicted a rally at this time. Facebook has unlocked 1.5 billion new shares during the recovery period, making them tradable at the NASDAQ stock exchange. A majority of the analysts had predicted that the shares would flood the market thereby, putting more pressure on Facebook stock price.

However, Facebook has performed well against all the odds, and now people are asking questions. Some are wondering whether the social networking giant would be able to sustain its unexpected rally, and for how long. The road back to anything close to its offer price is expected to be rough, but it seems as though anything above $30 per share is almost a certainty over the next two quarters. So, what exactly is driving Facebook’s shares upwards? I believe both fundamentals and investor confidence is at play.

Facebook has enhanced its Ads business on the mobile platform, something that has been termed as the company’s Achilles by a number of investors. The internet-based company’s mobile revenues represented 14 percent of the company’s total revenue during the September quarter. Since then, the company has also launched a variety of revenue generation streams, including Facebook Gift Service.

Facebook Gift Service is an eCommerce oriented business unit which allows users to exchange gifts. The social media giant charges a commission for every gift sent via its platform. This service puts Facebook in direct competition with Amazon.com (NASDAQ: AMZN) the market leader in online stores. The eCommerce giant also does compete in the tablets industry with its Kindle Fire and Kindle Fire HD tablets. Amazon sells nearly all types of products on its online store while Facebook targets Gift products.

It would be difficult for Facebook to mount any challenge in the eCommerce industry, but its massive user base gives it a great potential. However, for the meantime, Amazon and eBay (the other eCommerce giant) are in a class of their own.

Facebook’s recently introduced Ad monetization campaigns also give it some strong fundamentals going into 2013. The social media company introduced Sponsored Stories, which according to analysts estimates, has the potential to generate $1 billion annually worth of revenue. This type of advertising is in direct competition with Google (NASDAQ: GOOG) Search business.

The search engine giant also recently introduced Product Listing Ads (PLAs), which are cheaply priced as compared to the Google AdWords. The company’s new ad platform is believed to be cannibalizing on the AdWords space which are more profitable as compared to the PLAs. Nonetheless, analysts are of the opinion that Facebook’s Sponsored Stories Ad campaign is no threat to Google.

The Social Network giant has also launched a new eCommerce campaign, which targets the professional networking industry. Facebook launched its Jobs App as it seeks to rival LinkedIn (NYSE: LNKD) in the professional networking industry. However, it is expected that LinkedIn should prevail for the near term battle, with the long-term future up for grabs between the two companies. Once again, Facebook holds the potential to hold the lion’s share of the market in the long-term due to its massive user base.

However, LinkedIn has well established profile, which should prove a hard nut to crack. Additionally, Facebook faces a possible myth that a majority of its users may not be willing to mix their professional profile with their social profile.

Finally Facebook Ad Exchange (FBX) is another strong catalyst for the company’s performance. The social network giant introduced the platform in September. Interestingly, this is one kind of Ad campaign that does not need a Facebook user to be on the Facebook page for potential conversion into revenue. Notwithstanding, the campaign faces the risk of protests from users as it threatens to expose their privacy. The system uses Facebook members data and information to redirect specific Ads whenever they browse the internet.

Facebook’s trailing twelve-months profit margin stands at 6.28 percent while the operating margin is at 12.13 percent. The company’s most recent quarter revenues grew by 32.30 percent year-over-year. A majority of the analysts have increased their price targets to above $30 per share and have a Buy rating on the stock.

Indeed, Facebook looks set to trade well above $30 in the near future, but the road is bumpy with a lot of headwinds to come. Facebook closed at $27.71 on Wednesday.

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About Nicholas Maithya

I am a writer focussing on disruptive technology, Fintech, Big Data and Internet of Things, Online Marketing trends, and investments. When I am not writing about these, I am probably in the gym working out, out and about with family, watching the news (basically business/technology) or soccer. That's why I do sometimes cover soccer-related stories.

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