Facebook as a Good long term investment

Facebook Inc (NASDAQ:FB) is undergoing a sort of resurgence in recent weeks. A new slew of reports on the companies future have been released and a new investment thesis-narrative has raised its head. The general vein of these reports, is exemplified by a report published by Jefferies yesterday.

The report follows in the footsteps of many similar recent publications that suggest Facebook as a bad short term investment, but a great long term investment. Short term pressures stem from the expiration of several lock up periods in the coming months. The increase in supply of shares expected from sell off will decrease the price according to the analysts, sound reasoning.

The consensus, after the decline, seems to be a sustained period of growth for Facebook Inc (NASDAQ:FB). The company’s new ad formats, particularly it sponsored stories platform, seem to have managed to win the heart of many in the financial world. The coming launch of the Facebook Ad Exchange, and the firm’s newest innovation sponsored search, are helping to compound the thesis that the firm’s long term prospect are good.

This is all good news for Facebook. The company is still reeling from its unfortunately poor IPO, and investors may still seek a change in executives in recompense. Growing confidence in the firm’s long term might keep investor anger at bay, but it certainly deserves re-examination.

Jeffries’ investment thesis is as follows, advertisers must go online to follow their audiences, Facebook Inc (NASDAQ:FB) engages its users and reaches a larger audience than all but Google, making it an obvious target for advertisers. Facebook’s new ad platforms will result in a higher ARPU, and will follow users to their mobile devices. This should make the company’s revenue increase steadily in the coming months. The target price on this scenario is $30.

The upside scenario floated in the report assumes the company’s sponsored stories platform rolls out faster than expected, ARPU increases quickly with better advertising platforms, and new business models like Facebook Deals gain quick traction among the company’s audience.The target price in the upside scenario is $35.

The downside of the thesis assumes lock up expirations have a more profound than expected effect, users in western countries begin to abandon the network in significant numbers, the shift to mobile does not go smoothly and increases in ARPU are underwhelming, or non-existent. In the downside scenario Facebook is given a twelve month target of $15 per share, just 16% below its current price.

There are significant risk factors in the current model for Facebook, least of all its valuation, which at $30 is 61X the 2012 EPS of $0.43 per share excluding cash. That valuation puts significant pressure on the company to grow going ahead, something which is certainly not assured.

Facebook’s potential is massive, there can be no doubt about that. The company appears to be handling the gradual shift to mobile well, though not as quickly, or lucratively, as investors seemed to be expecting when the shares were purchased in May.

The stock is also risky. Facebook Inc (NASDAQ:FB) still operates in a sphere where the risks are not quite known. The boundaries are, as of yet, untested. Internet commerce has changed at an extraordinarily high pace since the last tech bubble. Very few of the firms involved in that crisis are still major forces on the internet today, a multiple of 61X grants Facebook the assumption that the company will stay ahead of the curb at all times.

There is huge potential for growth at Facebook Inc (NASDAQ:FB), but there are also huge risk factors. The stock may be a buy for many investors in the months to come, if the price sinks under supply pressures. The current narrative of the company as a buy for the long term is not deeply flawed, but target prices offered by most analysts are not justified, considering the risks associated with online business.