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Facebook Turning Heads With Hashtags

Saturday - 6/15/2013, 2:41pm  ET

Facebook has finally released its hashtag service for users. I played around with it for a couple of minutes. Hashtags are actually really interesting as they allow you to see what other people on Facebook are doing without having to be in their social network. This is the first time Facebook has decided against its closed social network of just friends.

Will this help to turn around the company?

Facebook is still offering privacy settings on the hashtag, but in the company’s public statement, the company believes that it will increase the social discussion on major events that are going on around people. The company quoted statistics of 100 million people using Facebook during prime time television. The statistic may imply that people will want to gain greater perspective on trending thoughts. This will hopefully increase the social aspect of the social network.

This could lead to better targeted advertising as most users do not change their profile information. In the future, advertisers will be able to place banner ads on the website based on the hashtags that the users use, and this will lead to more fine-tuned advertising. User engagement statistics will go up leading to higher conversion rates for advertisers, which will directly translate into higher average revenue per user.

How to position

The stock didn’t really respond much to the news as it pulled back by around 0.17% in the session. The moderate decline in the valuation of the stock implies that investors aren’t having very high expectations from this recent development. The Standard & Poor's 500 rallied by around 1.48% in the session.

The company trades at a bit of a hefty valuation with a 10.5 price to sales ratio, and a 67.9 price to cash flow ratio. The company has to make up for this high valuation with exponential growth. Hashtags are a welcomed addition, but the company needs to do even more to increase the average revenue per user.

The stock is likely to trade in the low $20’s until the management team executes upon a series of practical growth strategies like hash-tagging. For now, investors should hold their breath and see what else comes from the Facebook research labs.

The company will remain the most dominant social network for many years ahead, so long-term investors should look to accumulate the stock over a course of many years and months, rather than trying to day-trade the stock, as it is way too volatile.

Search will remain strong in mobile

Google may be in trouble because the company’s openly social environment is replicated by Facebook through hash-tagging. Google Hangouts created an environment for strangers to exchange ideas on topics of mutual interest. Now, Facebook is taking that away from Google.

Google still has a lot of pent-up growth inside it. The company’s Android Play Store sold $2.2 billion in applications in the first quarter of 2013. With IDC projecting that global sales of smart phones to double by 2016, app sales should grow exponentially.

I also predict that the number of internet users will grow to 5 billion people by 2020 from 3 billion currently. The demand for web-based advertising will also grow exponentially, making it a compelling investment opportunity for all of those who want to bank on web-based advertising.

Mobile advertising is projected to be a $27 billion dollar industry by 2017.

Source: Statista

The growth in mobile advertising will be a positive catalyst for Google. Google AdWords is a highly compatible business model with mobile. Facebook, on the other hand, could struggle a lot more than Google with this changing mobile advertising environment. Banner ads on a 4-inch screen will be difficult to monetize.

Online retail has the strongest moat

On Apple's iOS 7, Google will not be the default search engine, rather Bing will be used. This could be troublesome for Google as it is being pushed out of Apple’s product ecosystem just as mobile advertising spending is on the rapid rise. Therefore, both Google and Facebook could be hit with worries over growth and meeting earnings projection targets. Therefore, investors should also consider investing in Amazon.com .

Amazon is rapidly deploying its retail strategy internationally. The company reported 16% year-over-year growth in its latest quarterly earnings announcement from its international retail segment. This growth was negatively affected by European economic contraction, but this is likely to be temporary. Amazon’s global retail strategy should rapidly recover on a global economic recovery, which is why investors should stay the course with Amazon just based on the retail strategy alone.

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