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Is Facebook Inc (FB) Really Your Friend?

Facebook Inc. (FB)Social media use, like Facebook Inc (NASDAQ:FB) and Twitter, releases the chemical oxytocin, according to studies carried out by Dr. Paul Zak, professor at Claremont Graduate University. The chemical, well known to nursing mothers, could be called “the warm and fuzzies” chemical as it engenders a feeling of goodwill. Some have likened it to falling in love.

How Facebook creates a “buzz”

It’s a necessary chemical for humans helping mothers bond to their children, but Zak has also found it could lubricate the wheels of commerce and charity. In an ultimatum experiment subjects who watched a heart-wrenching video about a small child released more oxytocin and then gave more real money to unknown subjects in a test of charitable impulses. Thus Zak discovered oxytocin creates more economic empathy.

Now, what happens when someone is on Facebook Inc (NASDAQ:FB) and oxytocin levels rise as the social component does with its like, share, and friend signals? Another Zak experiment showed just ten minutes of social engagement, tweeting back and forth, raised oxytocin levels 13%. They are more susceptible to charitable impulses but also “feeling good” more likely to spend money. This social “buzz”  helped Facebook grow to over one billion users.

Fast Company writer Adam L. Penenberg participated in  Dr. Zak’s experiments and wrote of the possible consequences: “This will be the first study showing that oxytocin increases generosity to charitable organizations, and not simply to a particular individual. And if we can be induced to give more to a charity, well, it’s not that big a step to being induced to give more to a corporation, or a political party, or even a country.”

Investors feeling mighty fine

Reporting after the bell on July 24, the company stunned the market with much better than expected numbers for revenue of $1.81 billion and EPS of $0.19, but the real shock was mobile ad revenues improving from 23% to 41% of ad revenue. Investors had to be feeling very warm and fuzzy as the stock soared more than 20% in the after hours, close to its 52-week high of $32.51.

Facebook Inc (NASDAQ:FB) had been trying to monetize mobile for years and it seems the market can rest assured it finally is with over 800 million active monthly mobile users. Facebook had seen a decline in mobile advertising from $1.58 billion in Q4 of 2012 to $1.45 billion in Q1 2013, and the stock had been mired in the mid $20s. Mired no more with an increase of 58% in adjusted EPS and a 53% increase in revenue. Its forward P/E is 33.14, but that will probably be adjusted downward as will the current PEG at 1.57. Analyst upgrades will surely follow.

It seems CEO Mark Zuckerberg’s prediction in 2008 is coming to fruition: “I would expect that next year, people will share twice as much information as they share this year, and next year, they will be sharing twice as much as they did the year before.That means that people are using Facebook Inc (NASDAQ:FB), and the applications and the ecosystem, more and more.”

On the call, Zuckerberg said, “People on average are spending more time on Facebook than ever. Facebook share of time spent in the U.S. is steady or increasing and we believe elsewhere as well.” He also stated that a decline in use by teenagers, a favored demographic of advertisers, ” just isn’t true.”

There is no consensus on the value of a Facebook Inc (NASDAQ:FB) like, with charitable organizations reporting its value as $214.81 according to npengage (there’s that oxytocin kicking in!). The best research has come from Forrester and comscore, which hesitate to quantify actual dollar figures, but using the example of Best Buy, a Facebook fan will spend $218 more per year and be twice as likely to recommend the store than someone not a fan. With the latest earnings report one should probably add at least 10% to those numbers.

However, Porter Bibb, head of Media Tech Partners, in an interview on CNBC Fast Money hours before the earnings report said, “Home is a non-starter, and they’ve been unable to monetize Instagram.” Bibb flatly stated, “Facebook needs some serious management.” He faulted the company for a lack of a China presence.

Bibb mentioned Sir Martin Sorell, head of WPP, world’s largest advertising company, spent two weeks talking with Google Inc (NASDAQ:GOOG) Plus and was never invited to Facebook Inc (NASDAQ:FB). Jordan Rohan of Stifel Nicolaus said on CNBC after earnings that while Facebook only had several hundred ad sales executives to Google’s thousands or more, he believed that Facebook was “still underowned and underestimated.” And to be fair, Facebook has given advertisers a decent ROI on their ad campaigns: 13X for Samsung, 6X Bud, 5X for Lay’s potato chips.

Meanwhile, Google Inc (NASDAQ:GOOG) missed earnings estimates last week with search ad revenue numbers down. Investors were not feeling the “buzz” as the stock drooped from its high of $928 before earnings to $900 this week. Comparing Google with Facebook Inc (NASDAQ:FB) is difficult as Google Inc (NASDAQ:GOOG) is much more than  search ads (Android, cloud, tablets, Google Glass and much more), but it has been the lion’s share of revenue.

Google’s social platform, Google Inc (NASDAQ:GOOG) Plus attracts only a third of the numbers of Facebook, 359 million active users give or take, and they tend not to be as engaged, something advertisers demand.

Google is expensive at a 26 multiple when one compares them to rivals Apple Inc. (NASDAQ:AAPL) and Yahoo! Inc. (NASDAQ:YHOO) with its trailing P/E of 8.77. Although Yahoo! Inc. (NASDAQ:YHOO) whiffed its latest earning report too, the company has been a turnaround story under Marissa Mayer as CEO. Yahoo! bought some attractive assets this last year (summly, Tumblr, Flickr) and the gross margin at 80.90% is stellar. The company is a nascent media empire with its original video content and streaming competing with Google Inc (NASDAQ:GOOG)’s YouTube, Netflix, Inc. (NASDAQ:NFLX), and Amazon.com, Inc. (NASDAQ:AMZN).

So friend us already!

Facebook Inc (NASDAQ:FB) has given you the wink and the nod that it’s safe to fall in like with them, building a position slowly after the earnings oxytocin wears off.  Yahoo! Inc. (NASDAQ:YHOO) is still a story I like for its media content and reasonable P/E, and Google Inc (NASDAQ:GOOG) is just a tech behemoth that will continue to preform long-term.

The article Is Facebook Really Your Friend? originally appeared on Fool.com and is written by AnnaLisa Kraft.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG). AnnaLisa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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