Shares of Facebook Inc (NASDAQ:FB) have added about 12% over the past three months, rising during a period where analysts have warned about so-called “Peak tech.” The rise in FB stock coincides with the decline of Snap Inc (NYSE:SNAP), the parent of upstart messaging app Snapchat.
Despite the criticism of Facebook copying Snapchat’s features, the market has realized something that they probably already guessed:
Facebook has no plans to cede its social media dominance to Snap.
Reasons to Like FB Stock
The company continues to build up its photo-sharing app Instagram to resemble Snapchat, adding features that allow users the ability to digitally edit their selfies by adding various type of effects. While Snap — which added fewer users in the first quarter of 2017 than analysts on average — had expected has suffered immensely due to Facebook’s “flattery,” Facebook has flourished.
FB has improved by 33% year-to-date, compared with an 8% rise in the S&P 500 index, and just touched a new 52-week high Monday at $154.71.
Aside from its ability to dominate SNAP, Facebook’s ability to compete with larger rivals such as Alphabet Inc’s (NASDAQ:GOOGL) Google and Twitter Inc (NYSE:TWTR) in the realm of advertising make FB even more compelling. With consumers around the globe spending more time on digital media, the advertising industry is going through a huge transformation process presently. The growth of the internet and smartphones around the world continues to change media and content consumption.
As such, digital advertising channels are set to explode.
Facebook is approaching 2 billion active users, which is more than 10 times that of SNAP, meaning advertisers looking for a bigger bang on their ad dollars are finding it difficult to leave FB.
Consider Facebook property Instagram, which already has more than 600 million monthly active users and is putting up the same growth rate Facebook did at its onset. Meanwhile, WhatsApp has more than 1 billion users in its fold.
These assets, especially when combined with Facebook itself, will allow Facebook to maintain its stranglehold on digital advertising for years to come.
Management has warned that its current near-50% revenue growth rate will come down. But investors shouldn’t assume that the growth deceleration coincide with market share loss.
And when considering that half of Facebook’s revenue currently comes from North America, this means that there’s an underserved addressable market overseas that Facebook can tap into to offset the rate of decline. Meanwhile, the company’s strategic move into video, which CEO Mark Zuckerberg continues to tout, has yet to fully take off.
From my vantage point, though Facebook relies heavily on advertising for its lifeblood, the company still has tons of growth levers it can pull in the quarters and years ahead.
Bottom Line for Facebook
FB stock can now reach $170 by the end of the year, delivering an additional 12% returns. In other words, despite Facebook’s recent gains, the Menlo Park, Calif.-based tech giant is still a compelling bargain at around $154.
At 52-week highs, Facebook stock is not the bargain it was back in January when it traded under $120, but long-term thesis is still in play. But the stock still trades at 25 times 2018 estimates — 5 points below its historical average, which I believe is an attractive price.
And with research firm eMarketer expecting Facebook to reach some $30 billion in mobile ad revenue in 2017 and $38 billion in 2018 — translating to double-digit growth in both years — you can set a realistic target for FB stock at $180 by this time next year.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
