In one year, Facebook Inc (NASDAQ:FB) has added 298 million additional users. This is just one more metric proving that the Facebook powertrain is still going strong. Also, check out Facebook’s share price- already up at $172 from just $130 one-year ago. Perhaps- having seen the stock climb so persistently – it may seem like the share price is already too high to join the party. To this accusation, we would give a resounding ‘no’. In fact, I would even argue that now is a very good time to buy Facebook stock- with plenty of upside potential still to go. Here are five reasons why:
- Another Strong Quarter – First of all, Facebook’s earnings give no indication of a slowdown. On the contrary, the social media titan just released results that, yet again, beat expectations. Note EPS of $1.32 smashing the $1.13 consensus estimate, while revenues of $9.32 billion beat estimates by over $100 million and showed a huge 45% year-over-year growth rate. Profit was also up 71% year-over-year. Encouragingly, internet advertising did not slow down as feared. In fact, with Facebook now at the forefront of mobile ads, it seems like it has its leadership position secured.
- Outstripping Competition – One reason why Facebook is so successful is that it is taking on the competition, and winning. Take popular photo disappearing app Snapchat for example. After the company rejected FB’s $3 billion offer, Facebook simply set about replicating key features with its own Instagram app. Data firm Snaplytics sums it up, “while Snapchat has had a downward-going slope in terms of influencer activity, Instagram Stories is gaining more and more traction.” In fact, in Q2, Snap reported 173 million daily active users, far less than the 250 million users of Facebook’s Instagram Stories. Instagram also ensures Facebook stays popular with a younger demographic, while the older generation stays glued to the original Facebook site.
- Video Potential – Facebook has been heavily investing in its video offerings and so far this strategy speaks for itself. In the last quarter, mobile video ads brought in $8 billion boosting overall ad sales considerably. Now FB is looking to the future and plans to start producing its own original content. Recently FB introduced a limited roll-out of the Watch tab that will feature personalized recommendations of live and recorded shows to watch. It is true that this is a risky move given the competition from sites like YouTube and Netflix. But the payoff, especially in terms of ad spend, could be massive. For example, for exclusive original video content, Facebook partners will earn 55% of ad break revenue while Facebook retains 45%. The move will also enable FB to capture the increasing eyeball shift from TV to the Internet and mobile.
- Room to Grow – It would be easy to think that Facebook can’t grow that much bigger. After all, the site already has over 2 billion monthly active users. However, that assumption would be wrong. Facebook alone has seen user growth accelerate over the last two years. For example, year-on-year user growth came in at 17% in 2016, up from 14% in 2015 and 13% the year before. The point is that the world’s population is over 7.5 billion. This means there is still a significant population out there for FB to reach, particularly in developing countries. Because while Facebook may have captured 65% of the US and Canada, it has only penetrated 47% of Europe and 20% of the rest of the world. Fast growing developing countries, especially where internet access is expanding rapidly, are prime FB targets. Also, bear in mind that these figures don’t include WhatsApp and Messenger which also have over 1 billion users each.
- Reducing Valuation Multiples – Facebook is now trading at $172 a share. This is actually an attractive valuation because while share prices have increased valuation multiples for the stock have decreased. For example, Facebook’s PE ratio is falling (share price to per share earnings), as is its PS ratio (price to sales ratio i.e. dividing market cap by revenue) and EV/ FCF (enterprise value to free cash flow). From a fundamental perspective, Facebook has over $35 billion in cash and cash equivalents on its balance sheet and zero debt. Meanwhile its operating margin, now at 45%, has been steadily improving since about 2012, as has its ROIC (return on invested capital).
TipRanks analytics exhibits FB as a Strong Buy. Out of 35 analysts polled by TipRanks in the last 3 months, 31 are bullish, 2 are bearish and 2 are sidelined on Facebook stock. With a potential upside of near 12%, the stock’s consensus target price stands at $192.52.
Disclaimer: The author has no position or business relationship in any stock or company mentioned in this article, and he has no plans to initiate. The author is not receiving compensation for this article expect from Smarter Analyst. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.