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More Advertising? Facebook (FB) Stock Could Benefit, Says Analyst

Facebook (FB) is scavenging its platform for new growth opportunities, and it seems like it has found a new home for additional advertisements with Instagram Explore. The ads coming to Instagram Explore will appear when users scroll down once selecting a picture, rather than appearing in the original Explore page itself.

Morgan Stanley analyst Brian Nowak notes that this playbook to drive growth has been used before by the company. It starts with platform engagement, and monetization follows shortly afterwards. His analysis of the Instagram Explore opportunity shows that it could generate more than $1 billion of revenue by 2021, which would represent a 2% upside to Facebook’s current earnings per share. Over one-half of Instagram users visit the Explore tab every month and 20% of the time users spend on Instagram is in the Explore tab. Further, the average Instagram user spends 6 minutes a day on Explore.

Nowak has a positive view of Facebook stock as he reiterates an Overweight rating and price target of $210, which implies nearly 9% upside from current levels. (To watch Walmsley’s price target, click here)

There are a few reasons that may cause Explore ads to be worth more than Newsfeed ads to companies. When users visit the Explore tab, they are looking for something new and this should result in higher engagement with the ads. The search function on the Explore tab should also help companies target specific users, mirroring some of the effectiveness of Google’s search function. Nowak believes that this monetization opportunity will help Facebook approach $100 billion in revenue by 2021.

Monetizing Instagram Explore does not come without risks. Nowak wonders “how much of the spend will be incremental spend vs. substitutive?” As one of the last parts of Facebook’s platform that remains untouched by advertising, users may reduce their use of the tab with this shift. As the location where Instagram users find new content, it could present a long-term risk to engagement if users stop using the tab to search for new and relevant content.

All in all, with over $1 billion of potential revenue through the Instagram Explore monetization opportunity, Nowak and Wall Street remain bullish on Facebook stock. TipRanks shows a large amount of bulls liking the odds on this social king. Out of 39 analysts polled in the last 3 months, 35 are bullish on Facebook stock, while 4 remain playing it safe on the sidelines. However, is the stock overvalued or undervalued based on these analysts’ expectations? The 12-month average price target of $221.224 suggests a nearly 12% upside potential from where the stock is currently trading. (See FB’s price targets and analyst ratings on TipRanks)


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