Snap Inc (NYSE: SNAP) may have won the market’s attention in recent months since its IPO but investors looking for value in technology stock should watch Facebook, Inc. (NASDAQ:FB) instead.
New features in its Instagram app are driving usage. That development is troubling for Snap and Twitter Inc (NYSE:TWTR), which is struggling to keep its relevance.
Instagram Grows for Facebook
Instagram Stories now has 250 million daily users. Nearly a year after adding the Stories feature, usage is growing sharply. Facebook will invariably benefit from the strong numbers. It could even take Snap and Twitter customers away, thanks to the strong traffic numbers.
Still, advertisers may want more details on the user activity. Are the daily users posting stories or just viewing posts? Where do most users reside, geographically? Snap’s biggest demographic is the North American market. That makes each user count of higher value there compared to other social networking sites.
FB stock may shed some positive light on its Instagram growth when it reports quarterly results on July 26. Of the 36 analysts polled, the company is expected to earn $1.12 per share in the second quarter, up from 97 cents a share last year. The $9.19 billion revenue estimate implies sales will grow 42.8%.
In the last quarter, management issued light expectations. It said that ad blockers on the desktop would hurt ad revenue. Full-year GAAP expenses will rise by between 40% and 50%. Facebook is already experiencing a slowdown in growth in the U.S. and in Canada. Growth from the rest of the world moderated the impact of the weakness.
Fortunately, Facebook will offset the second-half weakness in ads by partnering with studios and sports teams to bolster video content. Not only will users stay online longer, but the video content will get more engaged on the site. Since video is the newer, less developed type of content on the social networking site, Facebook is separating it on another tab, away from the News Feed.
Until the company figures out how to balance revenue sharing, the company will not overwhelm the user with video.
FB Stock Gets an Upgrade
Ahead of the earnings report, Credit Suisse upgraded FB stock on Jul. 10, to $220 a share. The analyst cited better ad pricing and a moderating in an impression slowdown for the optimism. At a market capitalization of $463 billion, low short float and around $11 a share in cash, Facebook may even accelerate its growth rate by making a bold acquisition.
Its acquisition of WhatsApp proved a good move: this app, along with Facebook Messenger, each have 1.2 billion users. Had Facebook.com started losing users, they very likely would have migrated to one of several chatting apps, including WhatsApp.
FB stock could make its next acquisition in the gaming market. Electronic Arts Inc. (NASDAQ:EA) is expensive, with a $34 billion market cap, but the gaming customer could complement Facebook’s site or accelerate Oculus VR development. To spur sales, Facebook temporarily cut prices of the Rift VR headset and Touch controller to just $399. The regular price has also been lowered to $499.
The $399 price for the bundle will last for next six weeks. Markets might believe the unit is facing weak sales, but cheaper component pricing is one of the reasons for making the price adjustment. The platform also has enough games and movies to rationalize the promotion.
Takeaway
Facebook’s strong growth trajectory will face some bumps along the way as online advertising demand makes its seasonal shift. The company continues to invest in the core business during the slow summer period. This investment will pay off: Instagram Stories and WhatsApp continue to grow in popularity. At a forward price-to-earnings ratio of around 26 times, shareholders just need to hold the stock for the long term.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
