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Why does Facebook appeal to investors?

Following a period of rapid growth, Facebook launched an initial public offering (IPO) in 2012. It became one of the largest US technology flotations in history. After launching at a price of $38, the company’s shares experienced turbulence in the short term. But they’ve since recovered and now command a healthy premium compared to their IPO price.

Follow Facebook (NASDAQ:FB) publications and financial reports in their Investor Relations Page.

Facebook traditionally doesn’t pay a dividend, which may limit its appeal among income investors. But the business continues to achieve strong profits and impressive user numbers, making it popular with growth investors. As of December 2016, the social network boasted an average of 1.23 billion active daily users, with the vast majority based outside the US and Canada.

Who should include Facebook in their portfolio?

  1. People with ambitions to change the world. Facebook has already revolutionised how we interact with our friends and loved ones, connecting people in ways that would have been unimaginable 30 years ago. It appeals to investors who are keen to secure a stake in the technologies of the future.
  2. Investors looking for a steady financial performance. Facebook consistently delivers strong financial results and its profits run into billions of dollars. With mobile advertising now providing a significant stream of revenue, its financial outlook appears largely encouraging.
  3. Day traders seeking to profit from short-term movements in Facebook’s share price. Investors can use contracts for difference (CFDs) to achieve this.

What services does Facebook offer?

Originally centred on university students, Facebook has subsequently enjoyed a dramatic expansion under its founder and chief executive Mark Zuckerberg. These days, its mission is to give people the power to share content – with the ultimate goal of making the world ‘more open and connected’.

The Facebook website and mobile apps offer access to instant messaging services, while encouraging users to share engaging content via profile pages and news feeds. A photo and video sharing facility is another big part of the brand’s success, as is its ‘groups’ function which allows users to bring together different clusters of people all in one place.

Yet Facebook’s appeal stretches far beyond individuals, since businesses, government agencies and non-profit organisations can also set up pages on its website to promote their services. As a further string to its bow, Facebook is the owner of popular photo-sharing application Instagram, after buying the firm in 2012. It also owns the WhatsApp messaging app.

How Facebook’s shares are structured

Facebook’s public shares trade on the Nasdaq stock exchange in the US, under the symbol ‘FB’. At present, the company’s shares fall into two categories: ‘class A’ shares, which ordinary investors can buy and sell; and ‘class B’ shares, which are owned exclusively by company insiders. Both of these share types provide voting rights, although the ‘B’ shares offer more.

The group is currently considering plans to introduce new ‘class C’ public shares, which would trade under a different symbol to the ‘A’ shares and wouldn’t carry any voting rights.

Adding Facebook to an investment portfolio

Now that it’s a listed company, Facebook can be added to an investment portfolio using two main methods. They involve:

  1. Buying publicly-traded shares in the company. Facebook shares can be purchased directly through stockbrokers. The emergence of online stockbrokers has made this process much faster and easier compared to years gone by.
  2. Entering into a CFD based on Facebook’s shares. Rather than buying Facebook shares outright, investors can instead enter into CFDs based on them. Through a CFD, an investor and a broker agree to pay each other the difference between the current price of an asset (Facebook shares, in this instance) and the price at a certain point in the future. Essentially, a CFD allows a person to invest in the possibility of the asset’s price moving upwards or downwards. CFD investments are available through eToro.

What factors may influence Facebook’s share price?

The following issues might all have a positive effect on Facebook’s shares:

  • The brand’s effectiveness in dealing with rivals. Many start-ups have tried to snatch Facebook’s social media crown, but its long-established brand identity and commitment to innovation have largely left them in the dust. In many ways, its 1.23 billion daily user base speaks for itself.
  • An effective advertising operation. With vast amounts of consumer data at its disposal, Facebook can charge a premium for targeted adverts.
  • The ability to fund big acquisitions. With significant cash reserves behind it, Facebook has the financial clout to go ahead with game-changing acquisitions. WhatsApp and Instagram are just two headline-grabbing examples.
  • On a less positive note, potential clouds on the horizon include:
  • Controversy over ‘fake news’. The internet giant has come under fire for inadvertently spreading so-called fake news stories. These hoax articles seek to mislead the public for political or financial gain. Although Facebook is taking steps to combat fake news, recent controversies might still play on investors’ minds.
  • Questions over its VR investments. As with any company investing heavily in the technologies of the future, the jury is still out on many of Facebook’s acquisitions. For example, questions continue to be raised over whether its expensive deal for virtual reality firm Oculus will actually pay off.
  • The possibility of reaching saturation point. Although Facebook has achieved impressive growth over the years, there’s a danger that it could one day simply run out of new users. With more than a billion people already accessing the company’s services each day, might there be a limit to its user growth?

Technical Analysis for Facebook