3 Ways Facebook Is Disrupting Itself

by Gerelyn Terzo | July 16, 2014 1:39 pm

Nearly 1.3 billion of us use Facebook (FB[1]) on a monthly basis, so chances are you’ve considered FB stock[2] as an investment at one point or another. Maybe you’ve watched as shares of the social media giant couldn’t get out of reverse for much of 2012. Or maybe you bought later, and now that the stock is in cruise control you’re up nearly double digits year-to-date in 2014 and a more staggering 150%-plus over the past 12 months.

But could the forthcoming departure of CFO David Ebersman and a forward P/E ratio of about 55 mean the recent run is over for Facebook stock?

Is FB stock just too pricey right now, especially in light of the uncertainty associated with an executive departure and subsequent transition?

Let’s examine a few things Facebook is trying to keep those gains coming and whether not it will be enough.

Facebook has figured out mobile

Although video advertising remains a nascent part of Facebook revenue and earnings, it’s a bright spot. Even before the company’s acquisition in recent days of ad technology company LiveRail, video ads are comprising a greater number of ads on Facebook’s news feed, having inched up 1 percentage point in May to 10%, according to Piper Jaffray. As a result, the investment firm expects “video could present upside to numbers later in the year.”

The acquisition of LiveRail, a company that supports video ads for websites and mobile applications, is interesting. For instance, it appears that the video ad expert will continue to work with its roster of big clients, including Major League Baseball, Gannett (GCI[4]) and television network ABC to name a few. That means Facebook stock investors can look forward to additional revenue as budgets for traditional television ads are redirected towards online and mobile video.

Goldman Sachs analysts like the deal, having said in a recent report “LiveRail to aid video monetization:”

“LiveRail would be a strategic acquisition for Facebook that would increase its scale and insight on video ad delivery.” Goldman Sachs

Digital video ads in 2013 comprised less than 10% of total digital ad sales and only a fraction of ad revenue across channels, according to Pew Research. Digital video ads are expected to advance to comprise 15% of the broader digital ad pie by 2017, as per eMarketer cited by Pew Research.

Instagram and WhatsApp Monetizations

The next catalyst has to do with a $1 billion decision that Facebook made two years ago when it decided to buy Instagram, which has over 200 million monthly active users[5]. As Facebook continues to digest Instagram, which as Piper Jaffray still considers “ad free,” Facebook plans to roll out ads on the service soon. And while Facebook is putting more emphasis on growing Instagram than monetizing it at the moment, we could begin to see green chutes of monetization later this year. The investment bank writes:

“We continue to believe that Instagram will ultimately be a valuable ad platform for advertisers, but based on management commentary, we now do not believe that we are likely to see consistent advertising on Instagram until likely late this year at the earliest.”

Meanwhile, only about two years since its acquisition of Instagram, Facebook’s mega $19 billion acquisition of WhatsApp[6], despite recent regulatory inspection, is another potential catalyst. WhatsApp has a user base of some 450 million mobile users, which once Facebook decides how to monetize would be a huge growth driver.

“I think for investors who are looking out the next three to five years, what Facebook is putting together is a collection of platforms that’s incredibly powerful, and when you think about what they haven’t monetized, Instagram and  Whatsapp…I think the runway for this company is very long.” — Sterne Agee Senior Research Analyst Arvind Bhatia on CNBC.

FB Private Content

Facebook has proven that its mastery publicly shared information, but the company also has its sights set on private content, an area that its Messenger and WhatsApp (a deal finalization for the latter company notwithstanding) both specialize in.

“You’re going to see us do more things in more private content, I think. That’s an ecosystem that’s growing incredibly quickly. ” — Zuckerberg on the first-quarter earnings call

The timing couldn’t be better, as according to comscore cited in a Goldman Sachs report, desktop Internet traffic is a weak spot, with Facebook’s unique users last month (excluding mobile) falling 2% versus year-ago levels.

What it means for Facebook Stock

Considering RBC Capital Markets’ estimate for about $2 in EPS compared to $0.60 in GAAP earnings per share in 2013, the valuation appears justified. And while the departure of the CFO after a decade does introduce uncertainty, Zuckerberg really is the face of Facebook.

And yes, Facebook is a company that has proven it needs to grow by acquisition to remain relevant.

This is tech, an industry where companies historically invest back into the business to maintain high growth rates. So Facebook is only doing what tech companies inherently do.

If you’re thinking of investing in the social media space, FB stock looks like the one to beat right now.

As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities. 

Source URL: https://investorplace.com/2014/07/facebook-stock-fb-2/

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