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​The case for Facebook as a core stock holding

Although the stock market has been "wowing" investors with its display of stamina over the past five weeks in lifting equities against multiple headwinds, most investors are still skeptical about its sustainability. The market's often fickle mood continues to confuse, if not scare investors, particularly individuals.

Analysts suggest that such investors could benefit from a portfolio that includes "razzle-dazzle" momentum stocks that have proven to be authentic winners in both good and unpleasant times. True, they aren't easy to come by, but they are around and within reach -- with the caveat that diligent research is required to pick the real winners.

All that may sound trite, so how about a specific example of a stock that already has dazzled -- and continues to impress -- with performance that's driven by solid fundamental factors.

Facebook posts record quarterly earnings

The name that immediately comes to mind is Facebook (FB), the social network that has amassed a stunning $250 billion in market value in just four years since its IPO in 2012. After a wobbly start from that somewhat messy IPO, the stock has rocketed to a high of $117 a share earlier this year, way up from $17 -- yes $17 -- in 2012. The company has kept bumping higher since going public.

Formed by Mark Zuckerberg in 2004, Facebook has quickly ballooned into a behemoth with more than 1.5 billion monthly active users worldwide, a 50 percent global penetration. It generates almost all revenues from advertising and fees associated with its payments infrastructure.

Given its stunning climb, the basic question is whether the stock can sustain this run. Is it susceptible to a quick fall?

The possibility of a reversal is made vivid by the failure of another social media brand name, Twitter (TWTR), which has gone south after its IPO. Twitter went public in 2013 at $26, and closed on Mar. 18 at $16.83 a share. That's a big move down for Twitter, which celebrates its 10th anniversary this year.

Not many on Wall Street are betting on a major stumble or a disruption in Facebook's forward momentum.

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"We envision strong performance going forward," said Michael Napoli of investment research firm Value Line in a recent report. He argued that Facebook occupies an "enviable position within the social networking space, and should continue to experience favorable trends in member engagement." Growth in mobile advertising ought to remain the most important fuel for performance, so he expects strong revenue gains from several different avenues, including the Instagram photo-sharing platform Facebook acquired in 2012.

Napoli said Facebook stock "is ranked to outperform the broader market averages for the coming six to 12 months." He expects strong growth in revenues and earnings in 2016. "This trend will probably continue through late decade," said Napoli, who rates Facebook as "outperform," with a 12- to 18-month price target of $130 a share. The stock currently trades at $111.45, not far from its 52-week high of $117.59.

Instagram is one reason some Facebook bulls have become even more bullish. That's because they believe Instagram will be a huge contributor to revenues and earnings. "Instagram revenues are set to expand in the near future," said Jason Helfstein, equity analyst at Oppenheimer & Co., who pointed out that marketing agency checks have revealed that more marketers are launching ad campaigns on Instagram, while existing advertisers are raising their budgets. (Oppenheimer does business with Facebook).

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Helfstein, who recommends Facebook as "outperform," has a price target of $130 a share and noted that Instagram's business is expected to expand greatly, accounting for some 1.4 percent of Facebook's mobile ad revenue in 2015. The analyst expects Instagram's revenues will "conservatively increase to 13 percent in 2018," to $6.2 billion in 2018, way up from $981 million in 2016. Currently, Instagram has 200,000 advertisers, or 6 percent of Facebook advertisers.

This assumes platform users will increase 36 percent year-over-year to 640 million in 2016, said Helfstein. He noted that the user base of Facebook's several other products, including Groups, WhatsUp and Messenger, have reached over 600 million monthly average users (MAU). "We believe Instagram can reach similar levels and forecast 985 million MAU by 2018," driven mainly by international users, Helfstein projected. International users represented about 86 percent of total MAUs on core Facebook in 2015. Helfstein estimated that core Facebook revenues will grow some 40 percent in 2016, versus a 47 per cent rise last year (excluding foreign exchange adjustments).

With the fragmentation of media and communications, "we believe consumers will increasingly find media and information through their social graph, positioning Facebook in the middle of this information exchange," said Helfstein. And as the use of smart devices proliferate and boost Internet usage, mobile advertising should increase at Facebook.

The analysts expects Facebook will post another big earnings number this year, at $3.25 a share on revenues of $25.3 billion, way up from last year's $1.76 per share on $17.9 billion. For 2017, Helfstein projects earnings of $4.78 a share on estimated revenues of $37.2 billion.

Scott Kessler, senior equity analyst at S&P Global Market Intelligence, who rates Facebook as a "buy" with a 12-month price target of $130 a share, sees new monetization opportunities in the near term related to Instagram and videos. Facebook has considerable competitive advantages in social media, he noted, due to its "strong global brands, substantial user bases, high levels of engagement and considerable access to user data/information."

In the meantime, Facebook remains flush with cash, with $18.4 billion in cash and investments as of December 2015. Kessler expects it will use the cash to expand and enhance its technologies and offerings.

Summing up Facebook's outlook over the next few years, the numbers are clear: Gross margins, revenues and earnings are all expected to continue flying higher.

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