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Bull of the Day: Facebook (FB)

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Facebook shares surged after it reported stellar results for the second quarter, with strong growth across all segments. Thanks to its excellence in adapting to new trends and formats and investments in new platforms, the social networking giant’s growth remains unstoppable.

About the Company

Founded in 2004 and headquartered in Menlo Park, CA, Facebook (FB - Free Report) fosters social networks by helping its users exchange messages, post pictures/videos and play social games. People use Facebook to stay connected with friends and family around the world.

The company had approximately 15,000 employees and 1.71 billion monthly active users as of June 30, 2016. It has many data centers and offices around the globe.

Blockbuster Second Quarter Results

The company reported excellent results for Q2—crushing the Zacks Consensus Estimates on both top and bottom lines. Net income of $2.06 billion almost tripled from $719 million in the previous year quarter. This was their fourth successive quarter of earnings and revenue beat.

Over the past year, they added over 200 million users on a monthly basis and saw double-digit percentages year-over-year surge in time spent per person across Facebook, Instagram and Messenger (not including WhatsApp).

Facebook’s profits crossed the $2 billion mark just six months after exceeding $1 billion. Another tech behemoth—Google—took 3 ½ years to go from $1 billion to $2 billion.

Rising Estimates

After spectacular results, analysts have raised their estimates for the company. Zacks Consensus Estimates for the current and next year have jumped to $3.14 per share and $4.24 per share respectively, from $2.80 and $3.81, 30 days ago.

Multiple Growth Drivers

Mobile continues to be a major growth area with advertising revenue representing approximately 84% of advertising revenue, up from approximately 76% in the same quarter last year. Per eMarketer, Facebook’s market share in mobile advertising is expected to jump to 12% this year from 8.6% two years ago. Google is currently the largest player in the space and Facebook is the second, with others far behind.

Of late, the network has been transitioning to a more video centric format in its apps and services as it hopes that videos will drive growth going forward. At the time of Q2 earnings release, Mark Zuckerberg, founder and CEO, said: “We're particularly pleased with our progress in video as we move towards a world where video is at the heart of all our services."

Their live video product Facebook Live allows users to post videos in real time. They have signed deals with many companies and celebrities to produce live content. Push towards video would enable the company to grow its video advertising revenue.

Both Facebook Messenger and WhatsApp have more than 1 billon users now. While their Virtual Reality (VR) initiative  is relatively new, they already have more than 1 million people using Oculus on mobile phones and more than 300 apps available at the Oculus store for Gear VR—their partnership with Samsung.

Instagram Stories

Facebook’s subsidiary Instagram launched a new feature called--Instagram Stories--last week; it is very similar to Snapchat and lets users share their photos and videos that disappear after 24 hours. Snapchat is becoming increasingly popular among teenagers due to its disappearing feature and its user base has grown to more than 150 million. Instagram has more than 500 million active users.

Facebook had tried to acquire Snapchat in 2013 for $3 billion but the offer was rejected. It remains to be seen whether current Snapchat users will switch to Instagram Stories.

The Bottom-Line

Facebook shares are not cheap but given tremendous growth potential, they are still worth buying and holding for the long-term.

Disclosure: I own shares of FB in my personal portfolio. 

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