Yahoo Finance 10 Reasons Facebook Inc (FB) Stock Is a Strong Buy
Rewind the clock to 2012. Facebook Inc ( FB) stock had just gone public for $38 per share, giving it a valuation north of $100 billion. But roughly two months after its inital public officering, concerns that the company didn't know how to handle the increasing popularity of mobile caused shares to plunge. The stock would lose more than half its value, finding its bottom at less than $18 per share.
Anyone who bought in at those prices is a very happy camper today; in under five years, shares gained more than 600 percent. That said, Facebook stock is still an irrefutable buy. Here are 10 reasons why it belongs in evey investor's portfolio.
Google and Facebook dominate digital advertising. The digital advertising industry is absolutely massive, and still growing at double-digit rates every year. Google ( GOOG, GOOGL) and Facebook already dominate the space, accounting for 54 percent of U.S. digital ad spending in 2016, according to eMarketer. The two duopolistic firms are expected to seize even more market share in 2017 in a trend that's hard to see stopping any time soon. While Google has a larger piece of the market, Facebook's share is growing much faster. Analysts expect Facebook revenue to grow 37 percent in 2017, while Wall Street sees Alphabet revenue growing just 17.8 percent.
It's getting better at monetizing users. One of the metrics most under-appreciated by investors in FB stock is average revenue per user, or APRU. That metric measures how well Facebook converts users into dollars, and Facebook gets better at doing that every year. Contributing to that growth in recent years has been a focus on Facebook Video, which got off to a great start and established itself as a legitimate threat to YouTube; Facebook's singular ability to offer marketers some of the most targeted ad spots available has also helped monetization. Using its knowledge of everything you've shared, Facebook can show ads to precisely the demographic marketers want to reach.
Facebook is the best at mobile. Looking back to Wall Street's biggest concerns about Facebook shortly after its public debut in 2012, it's risible to think the biggest fear on investors' minds was an inability to pivot to mobile. By the end of 2016, Facebook had 1.74 billion mobile monthly active users. Mobile advertising revenue accounted for 84 percent of all advertising revenue at the company in the fourth quarter, long ago easing any initial fears surrounding monetizing mobile users. As users worldwide are migrating away from desktops and toward mobile devices, these are really important -- and impressive -- statistics. If this continues, mobile should continue to catalyze Facebook stock.
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Insane user growth. The sheer size of Facebook's platform is incredible: 1.86 billion monthly average users at the end of 2016. But what's even more impressive is how aggressively the user base is still expanding. After all, there are only so many people in the world, and at some point, user growth will have to plateau. But the year-over-year growth rate at the end of 2016 was 17 percent, which is hard to comprehend. While this was happening, Twitter ( TWTR) was growing its user base by a measly 4 percent -- to 319 million.
The network effect. Investors know that companies enjoying true competitive advantages are fairly rare. The competitive advantage that Facebook built, the network effect, is extremely imposing and difficult to duplicate. The network effect means that a business's goods or services become more useful to consumers as more people use them. There is no other social networking service remotely close to having 1.8 billion users, and for holdouts, each additional user increases the temptation to sign up for an account themselves. Building social networks isn't an easy sell to the first people using them, so Facebook's size gives it staying power.
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Instagram is fighting off Snapchat. While Twitter and Yahoo ( YHOO) continue to cede digital advertising share to Facebook and Google, Snapchat is emerging, as evidenced by the Snap Inc ( SNAP) IPO in early March. Snap is arguably the most visible emerging threat to Facebook's mobile dominance, so Facebook needed to find a way to slow the assault, and it did. Instagram Stories rolled out in August 2016 as a blatant Snapchat copycat, and it's been very well-received. The Instagram Stories success comes as Facebook has stepped up efforts to diversify its revenue streams by monetizing Instagram more aggressively; CEO Mark Zuckerberg hopes WhatsApp and Oculus will further diversify revenue down the line.
Zuckerberg has a grand vision for virtual reality. In 2014, Zuckerberg announced a surprise $2 billion acquisition: Facebook was buying the leading virtual reality company, Oculus VR. In his post announcing the purchase, Zuckerberg outlined how he saw VR -- and Oculus specifically, changing the world. It would start in gaming, where the Oculus Rift is currently sold with Windows-powered gaming PCs, and then expand to enable all sorts of immersive experiences. From basketball games to college classrooms to doctors visits, Zuckerberg outlined a world where Oculus allowed people to do all sorts of things virtually. If and when that day comes, FB shareholders will reap the enormous benefits.
New, secretive hardware projects. The blowout success of Instagram, incredible potential of Oculus, and the billion-plus members of both WhatsApp and Facebook Messenger give FB stock owners some decent diversification. But Facebook still isn't satisfied: it's reportedly hard at work developing mysterious next-level hardware technologies, some of which may be announced as soon as April. Rumored products that Facebook may unveil include augmented reality glasses, a drone, a brain-scanning product and some sort of medical device. It's hard to say without knowing more, but any one of these products could eventually propel Facebook into a new phase of growth a few years down the line.
Phenomenal valuation. Peter Lynch, one of the best investors of all time, sought out stocks exhibiting a combination of both growth and value characteristics. Lynch wanted companies with above-average earnings growth, but he didn't want to pay too much for them. He called the discipline of finding high-growth stocks with reasonable multiples GARP (growth at a reasonable price) investing. While FB's PEG ratio of 1.1 might technically disqualify it in Lynch's eyes, it's still close to being less than 1, and its 20.8 forward price-earnings ratio is only 13 percent higher than the Standard & Poor's 500 index. Given Facebook's growth potential, the premium should be much higher than that.
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Facebook's cons aren't too worrisome. Snapchat's threat has been largely mitigated by Instagram Stories, and the ultimate risk -- that Facebook falls out of favor or becomes "uncool" -- still hasn't materialized since its creation in 2004, giving it an impressive and meaningful track record. Plus, the network effect diminishes that risk every day with each new user. The biggest risk in the years ahead is the inevitable deceleration of revenue growth, along with Zuckerberg's permanent control of Facebook due to his consolidated voting power. Thankfully, Zuckerberg has proven to be a masterful CEO and an eventual deceleration is expected by the market.
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