Facebook Inc (FB) is not a cheap stock by most measures. FB stock trades at about 70 times earnings and 39 times next year’s earnings. Compare that to the S&P 500‘s 19 P/E ratio and 17 forward P/E ratio, and you’ll get a pretty good idea of how expensive the social media company is.
Value-oriented investors, myself included, have never been huge fans of FB stock, but two recent developments from the social media giant should cause open-minded investors to reconsider their predispositions.
Sticking it to LinkedIn
LinkedIn Corp (LNKD), although often mentioned in the same breath as Twitter Inc (TWTR) and the Google (GOOG) Plus platform, is pretty much in a league of its own. The first true hybrid of the social network/professional network dynamics, LNKD stock has grown explosively, soaring a miraculous 420% from its $45 IPO price in May of 2011.
Well, FB is sick of LinkedIn stealing the spotlight. With more than 1 billion users on its site already, Facebook can’t meaningfully expand its user base much further. What it needs to do is monetize its users more effectively, and Zuckerberg and Co. are seeking to do just that with their most recent move.
According to the Financial Times, FB is developing a business-facing service called “Facebook at Work,” which is rumored to let professional users chat with co-workers, reach out to other business contacts, and share and collaborate on work documents in the cloud. In other words, Facebook at Work takes aim at Google Drive, LinkedIn, and work email software like Microsoft (MSFT) Outlook.
It’s an ambitious project, and one that will likely face some understandable pushback when it comes to adoption, since most people like to keep some level of separation between their professional and personal lives. To that point, FT reported that the Facebook at Work product will be an entirely separate service from its social network. Phil doesn’t have to see those pictures of you acting like a fool at the office Christmas party last year.
The End of Promotional Posts
The second catalyst that could send FB stock skyward in coming years is its new, hard-line approach on promotional posts that Facebook took last week. On its blog, Facebook explained that it had received a high volume of complaints from its users about uber-promotional content overtaking their news feeds:
“People told us they wanted to see more stories from friends and Pages they care about, and less promotional content.”
Okay, so what does this have to do with FB stock? The impact on Facebook’s stock price becomes a little more clear as the blog post goes on. After looking into the problem, the company found that “a lot of the content people see as too promotional is posts from Pages they like, rather than ads.” And just what exactly is Facebook doing about this problem?
“Beginning in January 2015, people will see less of this type of content in their News Feeds.”
In other words, companies who’ve been subversively advertising with free promotional posts that go out to their followers will see those posts punished by Facebook’s algorithm, starting in January. Dramatically fewer eyeballs will be seeing their promotions.
It’s a brilliant move for Facebook and FB stock, because not only should it improve user experience but it should increase the demand for Facebook ads. Remember, in social media, monetization is the name of the game, and this company is starting to play that game pretty darn well.
I’m almost embarrassed to say it, but I’ve been incorrect all along about Facebook. FB stock just became a buy in my book.
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As of this writing John Divine owns shares of GOOG stock and GOOGL stock. You can follow him on Twitter at @divinebizkid.
