Facebook Inc (FB) stock has now surged 22% in the three days following its fourth-quarter earnings report. That gives FB, a social media platform, a market capitalization of over $320 billion.
While that clearly looks expensive, Facebook is pushing forward with new projects like Sports Stadium that could catapult FB stock even higher.
What’s Sports Stadium?
Sports Stadium is a new platform by Facebook that acts as a venue to discuss and follow live sporting events. Users can access the Sports Stadium platform by searching for a game on Facebook, which will then direct the user to that game’s FB page, where additional information can be found.
Much like Yahoo (YHOO) Sports, FB users can access live scores and stats, and find related stories. The one difference, of course, is the added social element.
With that said, the Sports Stadium platform itself is not going to create billions in revenue for Facebook, nor is the launch going to move FB stock short-term. Instead, it is the door that Sports Stadium platform opens, and the direction it takes Facebook, that is so appealing for FB stock owners.
What Sports Stadium Means for Facebook
While I suppose it is possible that FB goes on to become the next ESPN, the more likely scenario is that it attracts more ad dollars for those wishing to target sports fans, leads to a bump in Facebook’s revenue per user (ARPU) and opens the door for additional themes (i.e. cars, finance, news, etc.)
During Facebook’s fourth quarter, its global ARPU increased well over 30% and more than half of its revenue came from North America, where FB earned $13.54 per user.
Up until this point, most of FB’s growth has come from the increase in its ARPU, which has been driven by big investments in analytics and ad targeting. In essence, Facebook has some of the best technology for advertisers to target a specific audience of users, and offers its advertisers the largest user base on earth.
Where Facebook and the current advertising king, Alphabet (GOOG, GOOGL), differ is that the latter allows advertisers to target users based on what they are interested in at that moment whereas FB ads target users who may be interested in a product/service based on likes, demographics, etc.
While there is no question that Facebook is moving closer to Google-like status, it still can’t offer advertisers the ability to target consumers when they are most likely to purchase a product or visit a site. Therefore, it is going to be hard for Facebook to drive its ARPU from $13.54 in North America to upwards of $50, to Google’s level.
However, that could all change with Sports Stadium platform, and other platforms like it. FB can now offer advertisers the capability to show ads when users are most likely to act on that ad product. This gives FB some serious ad pricing leverage, and is why investors should expect to see ad prices soar at the speed that Facebook can roll out platforms similar to Sports Stadium.
What About FB Stock?
All things considered, the bottom line question is whether or not platforms like Sports Stadium can have a meaningful impact on Facebook’s income statement and whether FB stock can go even higher. The answer to those questions is “yes!”
Keep in mind, this question comes on the same day that Alphabet, a mostly Internet-based company that creates the majority of its revenue from advertising, became the world’s most valuable company. Alphabet is now worth nearly $560 billion, or more than 60% more valuable than Facebook.
That said, FB stock is not cheap — it trades at about 53 times last year’s free cash flow.
But given that it is the world’s largest network, and has countless initiatives like video, Instagram and mobile messaging that are growing like a wildfire, along with eight key projects that could catapult growth well beyond analyst expectations, I think FB stock will continue to be a great investment bet.
As of this writing, Brian Nichols does not own any of the aforementioned securities.
