Facebook's Law of Large Numbers Means It Can't Lose

NEW YORK ( TheStreet) -- For those of you thinking I have become the leader of the Facebook ( FB) apologists club, I'm here to tell you that is not the case.

However, I do tend to make it my business to interject whenever I come across conversations that exclude factors such as logic. In some circles, it's considered not minding one's business.

But in the new age of the Internet and open discussion, there is no such thing. Ironically, it is sites such as Facebook that have now taken this concept to a whole different level to the extent where it is now being loathed for having become great at doing what it once promised to do.

Among the increased levels of scrutiny the company continues to face regarding its business and also for having a valuation that exceeds that of companies such as Apple ( AAPL) and Google ( GOOG) from a standpoint of price-to-earnings ratio, Facebook now finds itself under attack and having to defend its credibility from investors that have started to question what is really in that 900 million number that it boasts about?

For some investors, 900 million is just too large of a number so therefore it can't be real. My response to that is "so what!" Because I see this as merely a continuation of what has been a string of sour-grapes reactions that have unfolded since the company's IPO did not perform as well as some investors would like.

In fact, I would venture to say that if the stock was sitting at $45 today, nobody would bother to raise the question. Instead, what we have are a group of people that somehow want to equate the disappointment from an IPO that was mispriced from the start, with a fundamental flaw within the company.

It seems that the target is now the 900 million reported accounts.

However, this is where investors are making another significant mistake by not understanding the laws of large numbers. As the chart above shows, Facebook continues to acquire users at a rate of 35% per year as it only reported 664 million in the first quarter of 2011. However, when readers are not questioning whether the 900 million is real, the argument is that how much more growth can the company acquire if it already has 15% of the world's population on it -- such as a reader from my recent article named Sabia Curjua who offered this:

They have captured most of the market of people likely to have a modicum of discretionary income. But per capita means all men, women and children. So, there isn't much upside left and this assumes all these people have computers or access to them and the Internet. About half the people I know have a FB account, but just use it as a free convenience and don't buy anything.

So where is the revenue driver other than advertisers who may eventually figure out, like General Motors (GML), that the ad dollars aren't creating the revenues normally expected (an anticipated 20-to-1 return). So FB is already a mature company and could eventually become another MySpace once the next fad site comes along.

Though the reader made a valid point, clearly she has not taken into account the company's global reach, and it has only started to grow. The chart below shows exactly to what extent over the past 12 months. So, essentially, of the 900 million accounts, the company has enjoyed exceptional growth and penetration in every geographic region of the world except North America where it has remained flat at 50%.

What's more is that when one compares the company's growth by geographic size, it becomes a bit more impressive by what it has been able to do in such a short period of time. Again, Facebook often gets chided for the fact that it does not produce anything. However, at some point it deserves a considerable amount of credit for doing things that traditional powers such as Microsoft ( MSFT) and even Apple have not been able to do.

The chart above shows the progress that the company has made over the past year in the largest geographic regions. It dispels the concerns presented by the reader regarding its growth prospects. However, an argument still remains that for all of the 900 million people that are using the service, the company had yet to figure out a way to get these users to open up their wallets -- even though it knows how much money are in these wallets and where they like to spend. However, one must not ignore that 900 million people is 900 million people. It is only a matter of time before it figures things out.

In the interim, I think it is foolish to discount the company's goldmine of demographic information, something that in itself is worth a considerable amount of money to companies in desperate need of targeted marketing to grow their businesses. Not only is the North American demographic growing but investors have to be pleased with how it continues to expand overseas -- Germany, Russia and South Korea have seen year-over-year growth of 47%, 74% and 57%.

Bottom line

As popular as Facebook is, it is still looking up to Google in the rankings among the most widely visited Web site in the world -- this according to alexa.com. While Facebook comes in a close second to Google, with the investments made by Microsoft and now Apple having adopted it into its new mobile OS, it is hard to envision going forward that the company will not eventually become the leader -- considering how the laws of large numbers are working in its favor. Now if only it can figure out how to make money.

At the time of publication, the author was long AAPL, FB and held no positions in any of the other stocks mentioned, although positions may change at any time.