Making excuses to not like Facebook Inc (NASDAQ:FB) and avoiding FB stock is just plain dumb. Ahead of the company’s fourth-quarter earnings report, I gave FB stock a Strong Buy rating with a 12-month price target of $150. With the earnings report now in behind us, I’m inclined to raise that target to $160.
Indeed, FB stock is no bargain when shares are near all-time highs, but the company’s revenue growth engines are certain to significantly impact the bottom line. Although management didn’t scale back on plans to increase capital spending, Facebook CEO Mark Zuckerberg, who said the social media giant was aiming for shorter-form content, has made clear that FB intends to dominate video, which is where the bulk of its capex will go.
And, that spending has already begun.
Last week Facebook hired Mina Lefevre, former head of scripted development at Viacom, Inc. (NASDAQ:VIA). This hire can only be for one reason: to increase Facebook’s transition toward developing original content. Contrary to popular opinion, Zuckerberg is not pushing Facebook to become a television network, nor does he envision the company competing with Netflix, Inc. (NASDAQ:NFLX). His drive to become a “video-first” company has everything to do with selling more ads.
From my vantage point, the reason Facebook must spend money is because it has begun to experience a problem that Twitter Inc (NYSE:TWTR) craves: It has run out of ad space on its news feeds. But, Facebook doesn’t want to sacrifice the user experience without first knowing what sorts of videos users will want to see — and how to make them less intrusive.
To that end, Lefevre, whose track record at Viacom-owned MTV Networks includes producing teen-focused content, is a solid hire. To the extent Facebook’s shorter-form content can put it into the realm of Alphabet Inc’s (NASDAQ:GOOGL) advertising juggernaut YouTube, it would have been money well spent.
In that regard, given Zuckerberg’s Midas-like qualities, it would be a mistake to avoid FB stock solely on the fears of high capex. It would make more sense to focus on the return Facebook can realize from its investments.
Bottom Line for FB Stock
Facebook — as it promised in the third quarter — has signaled that it will be in a period of transition. Investors, however, are now taking their time to see how the increased spending balances out with management’s warning of slow ad growth. While this might put FB stock in limbo, now is also the time to look at the big picture. And my crystal ball says to own FB stock, don’t trade it, and wait for $160.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.