Business

Social Trading Pros and Cons: Investing in Facebook Stock

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When it comes to investing in such a high-profile stock like Facebook, you might conceivably believe that the cat is out of the bag and that any potential value might have been squeezed with the current price level, but although it is a social media behemoth, who is to say that it can’t continue to evolve and keep delivering ever greater growth?

You can get the latest market news by visiting moneymorning.com/tag/facebook-stock-price/, and in terms of deciding whether Facebook is a stock that you can profit from, here is a look at some of the pros and cons to consider before making you decision.

A continuing growth plan

In terms of market capitalization, Facebook is now comfortably inside the top ten of the largest public companies in the world, and their value is north of $320 billion.

This puts the company ahead of long-standing businesses such as General Electric and household consumables giant Johnson and Johnson. The significance of that achievement is that Facebook has barely been around any time at all in comparison to these long-established stocks, currently 12 years and counting.

The reason why they have made such spectacular success is not just down to the fact that they can boast a highly impressive one billion users logging on to their site every month, by a lot of the growth has also been achieved through a number of significant acquisitions.

The likes of Instagram and Whatsapp have been taken under the wing of the Facebook family and no doubt there will be more to come for the undisputed king of social media.

This continuing growth plan could well point to the possibility for future rises in the value of Facebook stock, but when the classic scenario for investors is to buy low and sell high, the question that you have to find an answer to, is whether the current valuation manages to leave any room for enough growth to generate a decent return on your investment.

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Numbers look good

One way of assessing the future potential of Facebook is to take a look at their financials and how healthy the numbers look.

There were some concerns about how Facebook could generate good revenue from mobile users, but it has managed to seemingly dispel those worries with some impressive numbers. So much so that mobile revenue accounts for about 75% of total revenue, highlighting just how focused the company has become on this very important source of income.

Another positive to consider, is the news that Facebook has a free cash flow that is around $1.4 billion, a figure that indicates the business is in rude financial health.

It should be remembered that the social media landscape is highly competitive, despite Facebook’s obviously dominant position, but they have at least managed to stay ahead and increase revenue up to this point.

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Reasons why Facebook stays ahead of the game

The company has invested heavily in developing an algorithm which promotes content and allows what is considered to be great content, to be shared with a wider audience. The real trick here is that this algorithm looks at how users engage with this content, meaning it holds back what we don’t seem to like and promotes what we do like, giving each user a better experience in the process.

It understands how important video are, as they often have the highest engagement rates, and perhaps one of the most important points, it limits the ads shown to its users, meaning users tend to take a more positive view, when their experience hasn’t been hampered by irrelevant content.

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A few warning signs

There are always going to be pros and cons and you can certainly find a few warning signs that could cause you to take a more cautious or even negative view about investing in the stock.

There has been a decline in sharing. Although Facebook is still continuing to grow at a good rate, sharing of original posts has fallen by just over 20% in the last year. It is enough of a concern to have prompted Mark Zuckerberg to search for some way of reversing the trend.

Another obvious concern is that when you look at the current valuation level for Facebook, the stock is trading at such a high multiple, that future growth could well have already been factored into the price.

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If that is the case, as an investor, you will need to pin your hopes on the business continuing to defy expectations in order to justify a rating that recently equated to about 85 times earnings.

Whether Facebook is simply an exceptional business and continues to reward investors with further growth in the stock value, or whether all the value has been squeezed out already, only you can decide whether you want to pay to find out which description is more accurate.

Dominic Banks is a self-taught investor who is happy to share his knowledge and tips with others. Read his articles on investment and personal finance blogs.

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