Buy Facebook Now?

Since the long-awaited Facebook IPO has meant relative chaos for individual and institutional investors, this has been a black-eye for the financial markets. Between the last-minute Morgan Stanley research that may have changed the opening day orders, to the Nasdaq’s difficulty even opening the stock, Facebook seemed doomed from the moment it launched. At this point Facebook’s stock (ticker symbol: FB) has dropped from its IPO price of $38 to today’s intraday price of $26.92. If any of us bought the stock (I didn’t), we probably feel now that we should have followed famed guru investors like Warren Buffett, Charlie Munger, Jim Rogers, and others who had publicly announced that they would pass on the Facebook IPO and NOT buy the stock. And now that Facebook options are trading (that was fast!), those who thought the volatility would end have been even more surprised at the price movement.

But here’s the most bullish case for owning Facebook stock now, and making a long-term investment in this leading social media company.

Facebook-stock-bullish-IPO-ZuckerbergCredit: FacebookIf you already bought Facebook stock (from the secondary markets, or as a Goldman Sachs high-net-worth customer, through the IPO shares, or since it’s been public -- then you may already believe in the long-term growth story of Facebook. But if you’re still wondering if you should buy Facebook stock now -- after that crazy IPO -- here is the case for buying the stock.

Best Case for Facebook: Long Term Growth

This upbeat look at Facebook, the company, growing into its lofty (but declining) post-IPO valuation considers all the new and possible revenue and profit centers and can give you a reason to hold on to the stock for the long run-- if your so inclined to...

  1. The first step towards rapid growth for the company would be if Facebook could really crack open the keys to monetize its huge user base. These could be more social media games sales (for companies like Zynga [ticker symbol: ZNGA]), exploring their uniquely targeted ads, driving mobile ad revenue, and more. And perhaps as the FB platform matures as a public company -- more companies will feel comfortable with increased ad spending (except GM!).
  2. A Facebook phone or smartphone could be a game changer for the company. They could get into mobile in a serious way by converting many of their users to THEIR eco-system. If the price was very reasonable (= CHEAP!) compared to the iPhone, this could also drive major sales around the world, especially in emerging or frontier markets. And what special features could the phone include that would be a MUST for Facebook users? Built-in HD camera/video to enable instant photo-sharing, buttons for super easy page updates, accessing friend feeds, and more. 
  3. A portable device like a Facebook smart phone might position the company for POS (point of sale) transactions. Partnerships with Visa, MasterCard, American Express, or Discover could make this a portable payment device -- something many other companies are striving for.
  4. Say what you want about Mark Zuckerberg, co-founder and Facebook CEO, but he is clearly very driven, very committed, and very smart. Since he’s so young (b. 1984), he has many years ahead of him for innovation, growth, ideas, and development -- both as a technology and social media visionary, and as a corporate leader. Don’t underestimate a company’s potential whose CEO/founder could potentially stay for forty (40) years - growing and developing with his company. (If he stays at the helm until he’s Warren Buffett’s age (CEO of Berkshire Hathaway, BRK.A, BRK.B) he could run FB for 53 more years! Think of the innovation.
  5. Imagine what happens when Facebook finds serious inroads to its largely untapped markets -- like China, India, and elsewhere. This could drive rapid subscriber growth.
  6. Now that the company has publicly-traded stock (and options), Facebook now has a new “currency” for smart acquisitions -- both for interesting companies, revenue sources, and raw talent. There are many smart, hungry tech hopefuls out there who are BEGGING to be the next Instagram.
  7. Facebook as THE Cloud Computing play! With all of the unstuctured big data that FB has on its users, their habits, demographics, and networks of friends, colleagues, and interests -- they’re likely sitting on a goldmine of predictive analytics for a wide range of clients. Monetizing their social enterprise possibilities, opening up AaaS (analytics as a service), or even rolling out natural language processing of big data (think IBM’s Watson-as-a-Service or Apple’s possibilities with Siri-as-a-Service).

How to Buy Facebook Shares Now?

Facebook-stock-investCredit: FacebookSo if you believe in the Facebook story, and you want to buy the stock - should you just jump in and buy it now? Of course buying this company now at a $58B USD market cap is a much better deal than the $38 IPO price, but there is a safer way. Today (5/31/12) with Facebook at $27.25, investors can sell a cash-secured-put (CSP) to obligate themselves to buy Facebook. This gives the put seller (you), the added premium to give a better FB cost basis. Selling a FB $25 PUT for Jul 21 2012 expiration pays $170 now at the BID, giving investors a cost basis of $2330, if exercised. If not CSP sellers can keep the premium (here $170) and try again. 

For more experienced option traders, it’s also possible to sell a credit put spread, which gives you the benefit of a CSP, but with the added bonus of a hedged position in case the stock continues to drop. For example, sell to open an Aug 18 2012 FB PUT at the $26 strike and take in $290 (based on today’s market). For protection, option spread traders could BTO (buy to open) the Aug 2012 FB $23 PUT for $180. The net credit is $110 (the difference). But if FB stock falls more, the lower PUT is protection. Otherwise, the sold put ($26 strike could be exercised), giving the Facebook investor the stock at $2600 minus the credit of $290 for a cost basis of $2310. As long as the lower put ($23) has increased in value in excess of its time decay, it should be possible to sell the lower put for a gain (above $180) to lower your basis even more. If the lower put expires worthless and you still accept exercise, your basis is $2600 minus $110 (the net credit) which is $2490 or $24.90 per share. With these inflated options premium, it might be possible to trade some OTM covered calls (sell premium) against your position to additionally lower your cost.

Why not just buy shares outright? Considering the IPO lock-ups that will dump more shares on the market in 2012 -- selling puts might be a great way to get PAID to buy Facebook stock at your price -- if you believe in the growth possibilities.