Like It or Not, This is 'Generation Like'

 | Jul 24, 2014 | 9:00 AM EDT
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Are there any Facebook (FB) skeptics left? On a one-year basis, the stock has gained 173%, making this stock the best-performing large-cap in the U.S. Last night, after the close, the company reported a blow-out quarter. In my opinion, the shares should continue to move higher.

Facebook's second-quarter revenue jumped 61%, fueled by mobile advertising. Sales totaled $2.91 billion, and mobile ads accounted for 62% of all ad sales, up from 59% in the prior period. Net income jumped to $791 million from $333 million a year earlier. The company earned $0.42 a share.

The activity that is driving Facebook's ad network is truly mind-blowing. The network has 1.317 billion active users. Daily active users rose 19% to 829 million in the quarter. Mobile users rose 39.4% to 654 million. Average revenue per user hit $2.24, up from $1.60 in the year-ago quarter.

At this rate, the company should easily surpass the Street's year-end consensus revenue estimate of $11.988 billion. Of that $12 billion in revenue, at least $6.5 billion will be operating profit. Facebook should end the year with an 80% gross margin. Holy cow!

Full-year 2014 revenue should be up more than 53% from the prior year, and up another 31% next year. In 2009, Facebook had revenue of $777 million. If it can hit the estimate for 2015, the company will have achieved a compound annualized revenue growth rate of 65%. Clearly these guys know what they are doing!

At this point I don't see anything that can stop Facebook. On the conference call, management talked about adding a payment infrastructure to allow users to make payments on Facebook. It's also been speculated that Facebook will add Web search, so as to keep users on its site instead of losing them to Google (GOOGL).

Because of the company's outstanding execution, it is unlikely that the shares will correct very much. I would use any decline to build a position in the stock. 

I know a lot of naysayers out there are complaining about valuation, and saying that Facebook is a fad, but let's get real. You don't go from $777 million in revenue to $12 billion in five years on a fad. The shares are driven by revenue momentum, and revenue should continue to grow nicely over the next three years. Generation Like is taking over, and you should go along for the ride.



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