Facebook Inc (FB) has had a great run in 2014, rising about 35% year-to-date compared with gains of about 12% for the broader S&P 500.
Lately, however, Facebook stock has tapered off; In the last 30 days or so, FB is actually down 8% vs. a gain of about 6% for the broader market since late October.
So is this a buying opportunity, or a sign of distress for Facebook stock?
It’s most likely the former. And here’s why investors should consider buying into FB stock before 2015, as the social media company looks to power higher in the New Year:
1. Strong Facebook Earnings: While Facebook stock has been a bit soft since its latest earnings report, it’s important to remember that the pessimism on profits isn’t because of poor revenue or profits — it’s because of a commitment to spend big on R&D in 2015. In fact, when you look beyond spending, there are many signs of optimism, including a 59% increase in Q3 revenue to $3.2 billion, topping expectations of $3.1 billion, and net income of $806 million in the most recent quarter to nearly double 2013 numbers.
Click to Enlarge 2. Loyal Facebook Users: It’s hard to believe Facebook can keep growing after its dominance has already been asserted. However, in the most recent report, FB showed daily active users of 864 million worldwide, growing in all regions including already-saturated markets in North America and Europe. Furthermore, not only is there continued user growth, but those folks are engaged and making Facebook money. In the latest quarter, revenue per user continued to grow, hitting a rate of $2.40 worldwide — but most importantly, that figure grew from $6.44 to $7.39 in the U.S. and Canada for an impressive 15% growth rate.
3. Advertising Icon: Although Google Inc (GOOG) has long been the gold standard of Internet advertising, the flexibility and unique targeting of Facebook means that CEO Mark Zuckerberg & Co. are increasingly at the top of the list when it comes to marketing budgets. Ask any ad manager, and you’ll know that FB is a major part of any digital marketing campaign — and the launch of Facebook Atlas will allow for even more niche targeting, so Facebook stock should continue to benefit from strong advertiser demand in 2015. This is the company’s primary revenue stream and thus the biggest lever to move Facebook stock in the near-term.
4. Facebook Cash Hoard: FB boasts $14.3 billion in cash on the books, minimal debt and operating cash flow that will likely finish the year around $5 billion. Add a willingness to make big deals with stock-based acquisitions instead of bleeding down its war chest, and it indicates a well-capitalized company that is poised to do big things in 2015.
5. Mobile Payments Potential: In June, Facebook hired the president of eBay Inc (EBAY) payment arm PayPal in a move to innovate with its messaging platform — and presumably make big bucks from it, too. FB users already find value in sending communications via the Facebook Messenger tool, but sending and receiving mobile payments is a very real possibility — and an idea that is not unique, given Google Inc and its move to allow Gmail users to send money as an attachment via its secure platform. With the nearly 1.4 billion folks on Facebook, there’s plenty of potential here — and given the global reach of FB in so-called “underbanked” emerging markets, a mobile payments solution could really be a big deal in 2015.
6. Mobile, Period: Of Facebook’s impressive tally of 864 million daily active users, 81% of those users (703 million) are on mobile devices. That is a staggering audience, and shows that while some companies have been “disrupted” by the movement of consumers from PCs to smartphones and tablets, Facebook actually is leading the charge instead of responding to it. That assuredly will mean continued success for FB stock in 2015 while other PC-oriented companies continue to suffer.
7. Instagram in Focus: Facebook acquired photo-sharing app Instagram for $1 billion in 2012, and thus far we haven’t seen much out of the deal. But remember, Instagram was less than two years old at the time of the buyout and had no real strategy to make money. Since then, the user base of Instagram has grown to more than 200 million monthly active users and FB has been experimenting with a host of ad formats including video ads. Instagram isn’t broken out individually as of yet on Facebook earnings, but there is clearly a lot of potential here — and real contributions could start hitting in 2015.
8. Facebook at Work: According to reports, FB is working on a product designed to help working professionals network both inside their office and within their industry — which sounds a lot like Facebook will compete with social media stock LinkedIn Corp (LNKD) on this front. Facebook has already shown sheer dominance of personal social media use, so it’s natural to assume success on a professional level — and a nice new revenue stream from job ads and professional services akin to what LinkedIn provides.
9. Promoted Posts Pullback: Facebook has been the subject of criticism in the last year or so as big brands have paid big bucks to dominate news feeds with promoted posts. FB stock obviously benefits from the revenue, but apparently the brand tarnish — for both Facebook and the advertisers — has been enough for Facebook to pump the brakes on promoted posts. In a recent company blog post, FB said it will tone down the volume and in-your-face marketing of some promoted posts because its users “wanted to see more stories from friends and Pages they care about, and less promotional content.” Any time a company leaves money on the table at the cost of user experience it tells you two things: first that it has the long term in mind, and second that it isn’t desperate enough for cash to burn the house down. Both are good long-term signs for FB stock investors.
10. Wild Cards: Like Google and other dominant Internet stocks, Facebook is not willing to sit idly by and wait for a hungry upstart to leapfrog it. From its aforementioned purchase of Instagram to the nearly $19 billion purchase of messaging service WhatsApp, Facebook stock investors should be used to big-time wheeling and dealing from CEO Mark Zuckerberg. This is not a company resting on its laurels, and who knows what big deals or previous purchases may come to fruition and drive real value in 2015.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.