Social media darling Facebook Inc (NASDAQ:FB) recently detailed that 1.8 billion people across the world now use its namesake website and mobile application on a monthly basis. That’s just one of a number of mounting stats that justify a long-time bid in Facebook stock.
After all, that’s nearly 1 in 4 people across the entire globe.
More than a decade since its founding, Facebook is still experiencing impressive user base growth, and it’s monetizing all those users. Third-quarter revenues, which FB reported earlier in November, jumped nearly 56% to $7.1 billion. For the year, the total top line is expected to bound 52% for all of 2016 and another 34.5% in 2017.
That is remarkable growth considering sales could reach close to $40 billion by the end of next year.
The vast majority of Facebook’s sales stem from advertising and have continued to grow briskly since Facebook stock was first publicly issued in 2012. It may seem a distant memory, but back then most users relied on laptops and computers for the bulk of their internet surfing.
These days, most users rely on their phones to socialize via text and instant messenger, and to check social media sites such as Facebook. Internet advertising is literally booming and represented a nearly $60 billion market last year. Mobile advertising now represents close to half of that market.
Facebook, along with Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google website and Android phone software capabilities, control an estimated 71% of mobile ad spending. So really, investors wanting exposure to digital advertising have two viable options: Alphabet or Facebook stock.
We’ll compare both in further detail below.
Advertising-related revenue accounts for 99% of revenue at both firms, so both are bona fide bets on strong continued growth in online ad sales. Promising younger players include Snapchat and Twitter (NYSE:TWTR), though the latter’s sales are quickly stagnating.
Twitter’s growth has stalled out. It currently has issues growing its monthly active user base and keeping subscribers installed. This creates a negative overall cycle because advertisers are subsequently growing disenfranchised with the app. This cycles through to lower advertising growth.
Amazon.com, Inc. (NASDAQ:AMZN) is also thought to have potential to muscle into digital advertising, or at least the clout to help sell products on the web. And that is the end goal for advertisers, after all.
More Flavor on the Third Quarter
During its Q3 conference call, CEO Mark Zuckerberg spoke to the increased use of video, which Facebook’s users post in both a recorded and live format. The company also owns Instagram, a related social media app more focused on photos (and increasingly videos).
An active and growing user base is of obvious appeal to the companies and organizations that want to advertise on FB. User engagement, as well as increased usefulness of the subscriber base, is Facebook’s primary objective over the next three years.
Facebook is delivering on this goal, and Twitter’s tribulations demonstrate it is no easy task to keep the user base active and engaged.
Facebook’s five-year goal is to increase its “ecosystem” of social media applications. This includes the aforementioned Instagram, as well as Facebook’s own Messenger service and WhatsApp applications. Instagram now boasts 500 million monthly active users.
New apps are constantly in development, and Facebook has the financial clout to acquire any rival that might stand in its way. Cash on the balance sheet stood at $26 billion and is growing significantly each quarter. There is also no long-term debt on the books. The strong stock price also serves as a currency to buy competitors.
Bottom Line on Alphabet vs. Facebook Stock
Comparing Facebook to Alphabet, GOOGL trades at a slightly lower forward P/E multiple (19.1x compared to 23.5x for FB). However, it is growing more slowly than Facebook — in the next couple of years, sales should grow “only” 20% annually.
Despite the higher P/E ratio, Facebook stock is actually a very reasonable value given the growth expectations. Its cash flow production is even more impressive and is currently running ahead of reported net income. This provides a comfortable indication that earnings are strong and robust.
FB also backs out the tax benefit from issuing stock to its employees from its operating cash flow metrics. This stock issuance occurs for compensation and motivation purposes and is controversial because it represents a non-cash expense that certain tech firms choose to back out of profit reports.
The fact that Facebook considers it a bona fide expense (which it is) is commendable.
As of this writing, Ryan Fuhrmann was long FB, but did not hold a position in of the other aforementioned securities.
