Tuesday, September 3, 2013

Why Facebook Shares Closed Above $40 For The First Time

Facebook Facebook closed above $40 a share for the first time today, banishing more than a year of deep doubts about the company's prospects following its initial public offering of stock last year.

Technically, the closing price of $40.55, up more than 5% on the day, remains below the all-time high of $45. But that high came just seconds after the first day of trading on May 18, 2012, quickly falling back down to close just a little above the $38 offering price. But this is Facebook's all-time closing high.

What pushed shares above that symbolic level? Nothing today beyond a positive analyst comment or two. But several reasons for the stock's rapid rise, up more than 50% from the July 24 earnings announcement alone, stand out:

* The company's growth has reignited on all fronts after a pause last year. In particular, second-quarter ad revenues shot up a surprisingly strong 61%. And despite persistent rumors that younger people are abandoning the site in favor of up-and-coming social services such as SnapChat, Facebook continues to grow its user base.

* Facebook has loosened the reins on advertisers. Essentially, it has surrendered to the desires of its customers–that would be advertisers, not users like you or me–to run more of the kinds of ads they already know how to run, such as ads targeted to people based on what sites they've visited and what they've clicked on. Until last year, Facebook had mostly pitched ads with a social component, and to some extent it still is. But it was slow going convincing advertisers they were effective (and it still is). Now you're seeing a lot more ads targeted to your demographics and Web activities.

In particular, direct marketers have piled into Facebook thanks to these ads, which are rivaling Google Google's lucrative search ads in their ability to get people to buy something or register or otherwise do what marketers want, right now–not just to make them aware of the brand or a product they may buy later. "Facebook is proving itself to be a strong direct-marketing medium," says Aaron Goldman, chief marketing officer at digital ad firm and Facebook ad partner Kenshoo.

* CEO Mark Zuckerberg showed he knows how to redirect the company in response to changing markets. Most notably, he shifted Facebook sharply toward developing products and ad formats for mobile devices. From zero mobile ad revenues at the time of the IPO, Facebook has quickly jacked up mobile to 41% of overall ad revenues. In fact, these mobile ads, which appear directly in the central news feed, quickly migrated to desktop news feeds as well, where by all accounts they draw much more attention and clicks.

What's more, Zuckerberg has shown he can move quickly. His decision to buy Instagram, the photo and now video sharing service that could provide its next big set of services and ad opportunities, was done in a weekend of wooing of CEO Kevin Systrom, before the Facebook board even knew it was happening.

* Investors are sheep. Facebook shares seem to be a momentum play again, at least for the moment.

Facebook's newly rejuvenated valuation of nearly $100 billion is for a business that's expected to earn about $1.2 billion in profits on about $7.5 billion revenues this year. Whether the folks buying today are wise or stupid, vs. when the shares were dwelling at $17 and change, is anybody's guess.

The Evolution Of Facebook

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