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Two years after IPO, Facebook is the new Microsoft

Shortly before Facebook Inc. went public in 2012, a poll of more than a thousand professional investors, analysts and traders came to an overwhelming conclusion. The social media giant was overvalued, according to 79 per cent of those surveyed.

Two years later, the skeptics are practically extinct. Facebook vanquished the doubters by pulling out a weapon they never expected: strong, growing earnings.

When the company reports results on Wednesday, it's widely expected to unveil yet another quarter of surging sales and profits. Forty-three of 52 analysts who follow the stock label it a "buy" and the consensus estimate calls for the company to enjoy an 88 per cent jump in earnings per share compared to the same quarter a year ago.

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Why did professional investors get Facebook so wrong two years ago? It was largely a case of mistaken identity.

The pros figured the company for a nerdish fad that would soon, inevitably, face competition from an even cooler upstart. Not so, it turns out. Behind the company's still vaguely hipster image circa 2012 lurked a buttoned-down utility intent on squeezing out competitors and producing steady profits.

These days, Facebook is the new Microsoft – a company everyone professes to hate but uses anyway. It's long since stopped being cool. (Heck, your grandma is probably on Facebook.) It's become even boring. (When was the last time you raved about a new feature?) But its user base and its revenue keep on spiralling higher with no apparent end in sight.

Its gains come despite its increasingly obvious grabs for cash. When it went public, its hoodie-wearing CEO Mark Zuckerberg wrote a letter proclaiming that "Facebook was not originally created to be a company. It was built to accomplish a social goal – to make the world more open and connected."

The company has taken to interpreting its mission statement rather liberally. It has boosted its advertising rates by moving ads into users' news feeds. Its latest initiative, still in the trial stage, is a "buy" button on sponsored ads that lets users purchase a product simply by clicking.

The business that began with a social mission is now becoming a vehicle for impulse shoppers. But while users may gripe, the bottom line tells a different story. Analysts expect revenue in the second quarter to surge nearly 55 per cent from a year earlier.

One big driver of the company's recent success is mobile traffic, which accounted for nearly 60 per cent of its total ad revenue in the first quarter. Most analysts expect mobile's contribution to be even bigger this quarter.

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Looking further ahead, international markets are likely to fuel the next stage in Facebook's growth. Bloomberg News reported earlier this month that Facebook is on the verge of opening its first office in China, even though its website remains blocked in most of the country.

India is already the company's second-largest market, behind only the U.S. in terms of number of users. Each Asian user generates less than a fifth of the revenue of a U.S. user; if the company can close that gap and open up China, its revenue will shoot skyward.

So what could derail its progress? Growing disaffection among young users in the United States could be a hurdle. Digital consultancy iStrategy Labs released a report earlier this year suggesting that Facebook has millions fewer young users now than it did in 2011. But nearly nine out of 10 college-aged adults still use the service, which suggests the worries, at least for now, are overblown.

Facebook's relentless push to cash in on users' interactions will inevitably hit a ceiling at some point, but all the evidence suggests that day still lies well into the future. The company that nearly everyone once underestimated is now difficult to overestimate.

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About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More

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