Facebook (FB) stock has outperformed the NASDAQ by a margin of 5:1 in 2015, trading higher by 30%. Since Facebook’s 2012 IPO, FB stock has more than doubled the performance of the NASDAQ, thriving in advertising and mobile, and now has a slew of new projects to push the company forward. However, after such a great multi-year span, the big question is whether the gains will continue, or if Facebook stock will have a setback in 2016.
FB Is Not Cheap, But Cheaper Than You Think
Facebook stock is currently priced at approximately $107, and that supports a market capitalization of just under $300 billion. This makes Facebook one of the most valuable companies in the world, more than AT&T (T) and Ford Motor Company (F) combined. When you think about it that way, there’s no way FB stock can go higher, right?
Facebook may not be selling millions of cars each year, or providing mobile service to 100 million people, but the social media giant is an advertising king, and with well over 1 billion active users it has the largest network the world has ever seen, by a long shot.
Furthermore, FB is a very profitable company with an operating margin over 30%. Therefore, despite having very little revenue relative to its market capitalization — Facebook stock trades at 18.5 times its trailing 12-month revenue — FB trades at just 36.7 times next year’s expected EPS.
While 36.7 times forward earnings may seem very expensive, keep in mind that advertising juggernaut Alphabet (GOOG) (GOOGL) consistently trades with a P/E ratio over 30. In other words, if Facebook stock were to trade flat for approximately one year, and grow its EPS by 32% to $2.86 next year, then it would be trading at near the same earnings multiple as GOOGL is today.
In other words, FB stock may look very expensive because of its market capitalization, but based on earnings expectations and its growth outlook, there might be actually be upside for FB.
Surprise Catalysts to Watch in 2016
Facebook is expected to grow EPS by 32% next year, but will also grow revenue by nearly 38%. This would represent a slight slowdown from the 40% revenue growth that analysts expect for 2015.
Moreover, these numbers suggest that analysts are figuring a continuation of Facebook’s current business model, which includes advertisements sold to both desktop and mobile users for the Facebook and Instagram platforms. However, there are quite a few catalysts that may not be figured into Wall Street’s model.
One catalyst is the monetization of mobile messaging services WhatsApp and Facebook Messenger. FB launched the Messenger platform earlier this year, which allows companies to communicate with users of the app. There has been a lot of speculation on exactly how FB will monetize its 700 million Messenger users, and its nearly 1 billion WhatsApp users.
I have suggested in the past that FB could launch a payment service like PayPal (PYPL) or Western Union (WU) to create billions of dollars annually. However, it appears that FB is more set on something called “click to message” ads, where it allows businesses and advertisers to create ads for certain products and services and then send them to Messenger users.
Regardless, I have suggested often that FB could earn billions of dollars annually once ads roll out to Messenger and WhatsApp, thereby creating revenue from a combined 1.5 billion users who aren’t seeing ads on either platform.
In addition to the untapped potential for Messenger and WhatsApp, there is video advertising on Facebook. At the beginning of November, there were 8 billion daily video views on FB, and I figure that this could be a $10 billion market opportunity for FB.
FB Stock Catalysts Must Materialize
These are two massive opportunities that analysts are likely figuring into their predicted numbers for 2016. Hence, whether FB trades higher in 2016 will be determined by its ability to beat analyst expectations, and that can happen depending on what moves it makes with the Messenger platform, WhatsApp, click to message, PayPal-like payment services, monetization of the content it is hosting, and its virtual reality initiatives.
The bottom line is that, with so many monthly active users, there are a lot of ways that FB can earn money from its platform. If FB is quick to pursue those opportunities, then Facebook stock will go higher in 2016. If not, it will likely still go higher, thanks to favorable investor sentiment, but only moderately higher. Either way, Facebook stock is well-priced for even more gains in 2016.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
