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Facebook: Conviction Rewarded

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The following is a sample report of Sean's TechStrat Report.

I have been in the extreme minority view on this name by being bullish, and have had to listen to an extreme amount of negativity in the media. I'm not tooting my own horn here (ok, maybe a little) but I have stated that THE reason everyone is worried about Facebook (NASDAQ: FB) (being mobile) is THE reason to own them. What is also interesting is that FB (like Google (NASDAQ: GOOG)) is nowhere close to maximizing revenue and EPS opportunity. Both companies leave a lot in reserve.

Case in point here is what FB delivered on the EPS line. FB is choosing to spend lot of it's growth on significant R&D vs. having a short term focus on margins. Yep, GOOG has been doing that for years and thus it's been very hard to any other company to show a similar pace of innovation. FB seems just as aggressive with this type of investment. And I do think that FB is a long on just this fact (well assertion). They will enter search and execute well. I will be covering this topic more in depth in the coming weeks.

But enough of the future soothsaying. Here are my key observations from the quarter. Much of which I have been highlighting could happen the last few weeks in the TechStrat Report:
  • Facebook reports Q3 adjusted EPS 12c, consensus 11c, with revenue $1.26B, consensus $1.23B -- Again, they could have had a material EPS beat had they even moderately contained R&D spend.
  • Zuckerberg states that the mobile opportunity is the most misunderstood aspect of the company. -- Wow, how many times have I said this exact thing.
  • Mobile users up 61% and monetization resulted in Facebook generating 14% of its ad revenue from mobile in the quarter.
  • Facebook reports monthly active users up 26% to 1.01B at quarter end. -- This looks like it could point to further re-acceleration.
  • Daily active users were 584M on average for September. -- I think Facebook will focus next on trying to engage greater active user numbers. Thus look for more interactive product innovation.
  • Ad revenue growth was driven by the mix of "number of ads delivered, price per ad, with ad revenue growth".
  • Ads delivered grew by 27% and a 7% increase in the average price per ad.
With regard to those last two bullets I wanted to distinctly state that the increase in the price per Ad is very notable and a primary reason the stock is rebounding so strongly. However, this price per ad metric will ebb and flow over time. I'm more concerned (and pleased) with general mobile strength, and in that regard I will highlight that the 14% from mobile folks, is simply huge. It quickly reminds me of the fact that GOOG's mobile revenue now has an $8B run rate from just $2.5B a year ago. However, while the FB growth in mobile is essentially off a base of ZERO, the fact that the 14% essentially came in two quarters is surprising even to me. Even if I moderate that rate of growth it's not too hard to project FB's mobile revenues becoming bigger than desktop in something like 18 months (though probably less). With that thought I'll leave with a last prediction. When FB is generating greater than 50% of revenues from mobile, the stock will be significantly above the $38 IPO price point.

The TechStrat Report by Sean Udall. Sean provides in-depth analysis, strategies and trades across the technology sector. Take a FREE 14 day trial.

Twitter: @UdallTechStrat
POSITION:  Position in FB, GOOG.