Should I Buy Facebook (FB) Stock? 3 Pros, 3 Cons

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Facebook (FB) stock has come a long way since its initial public offering in 2012. Initially considered one of the biggest IPO flops ever, in retrospect, the offer price of $38 per share was a steal. In the three years since its first day of trading publicly, shares are up more than 130%, trumping the returns of the S&P 500 by more than 75 percentage points.

Should I Buy Facebook (FB) Stock? 3 Pros, 3 ConsNot too shabby.

Those gains have come not just on rampant user growth, but also Facebook’s ability to monetize those users.

But despite its impressive showing on Wall Street in recent years, questions still swirl around FB stock — among them being, “How much bigger can Facebook get?” and as usually is the case with most tech stocks, “What’s next?”

So, should you buy Facebook stock? We’ll look at three pros and three cons to decide.

FB Stock Pros

Instagram Ads: Facebook, which also owns social media platform Instagram, is directly analogous to Google (GOOG, GOOGL) for the simple reason that both companies are absolutely dependent on digital advertising revenues. Purchased for $1 billion in 2012, Instagram now has 300 million monthly active users; at the time of its purchase it had 27 million users. The thing is, FB has never really pushed too hard to monetize Instagram, fearing it could alienate users by doing so. Now that it has the masses hooked, FB will start serving Instagram ads, monetizing that massive user base on top of the 1.4 billion people it already serves ads to on Facebook. In a nutshell: Instagram will finally start contributing to revenue growth, which should be a net positive for FB stock.

Oculus: Another Facebook acquisition, virtual reality company Oculus, was the impetus behind one analyst’s recent assertion that FB stock is worth $120 per share. Citing the fact that the first consumer version of its VR product is due in the early part of 2016, Piper Jaffray believes the stock could rally as the launch date approaches. I tend to agree, and believe Facebook’s willingness to team with Microsoft (MSFT) to bring Oculus to the Xbox is the beginning of a huge step forward for virtual reality in general … but Oculus in particular.

ARPU Increases: We all know that Facebook is massive. By the end of 2014, its user base was more than double the second-largest social media site in the world, QZone, which had 629 million users to Facebook’s 1.3 billion. Google+ had 343 million, LinkedIn (LNKD) 332 million, Instagram 300 million, and Twitter (TWTR) 284 million, according to Statista. The question now is: How much does Facebook make per user? Average revenue per user, or ARPU, is a vital statistic that investors should be watching. In Q1, Facebook’s worldwide ARPU grew by 25% year-over-year to $2.50. In the core geographic region of the U.S. and Canada, ARPU roared 42.2% higher, jumping to $8.32.

That all sounds great, but that doesn’t means there aren’t downsides to FB stock. Next up are three cons to owning Facebook shares:

FB Stock Cons

Pricey Valuation: Perhaps the most common measure of a stock’s value is its price-to-earnings ratio, and FB stock doesn’t look like such a great deal on that metric, trading for 83 times trailing earnings. To put things in context, that’s about four times higher than the P/E multiple of the S&P 500 right now, which stands around 21. Even Facebook’s forward P/E, which takes into account expected future earnings, is unattractive. FB stock trades for a forward P/E of 32, while the S&P trades at a forward P/E of roughly 18. Facebook definitely isn’t underappreciated.

The Biggest Growth Is Behind It: Facebook’s most dramatic growth days are definitely in the rearview mirror. After all, when you have a user base of 1.3 billion people in a world of 7 billion, you literally can’t grow your user base by 10x. Seeing as slowing user growth is one of the main gripes with TWTR stock, how much longer is it before investors stop and realize slowing user growth is a fact of life once you reach a certain size? You might not want to be involved with FB stock when Wall Street figures that out. While Q1 2015 growth in monthly active users of nearly 13% wasn’t bad, it was a noticeable deceleration from the Q1 2014 uptick of 15%.

Anyone Remember Friendster? This last threat is less quantitative than qualitative, but to ignore that it’s a con would be to miss a very big part of the FB stock pros/cons calculus. In short, the issue boils down to this: What guarantee do we have that Facebook won’t rapidly decline in popularity — indeed, that FB won’t descend into outright obscurity — like once-hot platforms MySpace and Friendster did? The answer: None. And with a recent Pew survey showing that Facebook usage among teens has fallen from 77% to 71% in recent years, there’s a chance that this could be the beginning of the end of Facebook’s “cool factor.”

Verdict

So what’s the final word?

Ultimately, I think that the growth profile of FB stock far outweighs the risks that threaten the company. Facebook’s been pretty darn popular for a few years now, and it now has far greater staying power than MySpace or Friendster ever had. Probably more importantly, Facebook has far more data than MySpace or Friendster ever had, and it has some data that even the likes of Google and Apple (AAPL) don’t have.

With the monetization of Instagram and the emergence of Oculus, Facebook is taking out insurance policies just in case its popularity dies off suddenly. That should further insulate the stock from big losses.

As of this writing, John Divine owned shares of GOOG stock and GOOGL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/should-i-buy-facebook-fb-stock-3-pros-3-cons/.

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