Buy Facebook (FB) for the WhatsApp, Facebook Messenger Possibilities

Last week, eMarketer unveiled its latest estimates for Facebook’s (FB) ad revenue, numbers that are consistent with Wall Street firms.

FB Facebook MessengerWhile eMarketer and others alike are expecting rapid growth from the social media giant, there’s a good chance that eMarketer and analysts are underestimating FB due to a missing link.

That missing link: Facebook Messenger and WhatsApp.

If you look at eMarketer’s outlook, the research firm expects Facebook’s ad revenue to grow 41.8% this year and generate $16.29 billion in revenue. Then, ad revenue is expected to grow 31.5% in 2016 and surpass $21.4 billion.

The majority of this revenue and growth will come from Facebook’s core site and app, but some of the growth will come from Instagram’s $600 million in expected ad revenue this year. Now that FB is finally monetizing Instagram, analysts are expecting it to be Facebook’s next big money-maker, with eMarketer expecting growth of 149% and ad revenue of almost $1.5 billion in 2016.

Nonetheless, it is safe to conclude that Facebook’s core site and app are still the overwhelming majority of Facebook’s business while Instagram is starting to find its place. However, Facebook Messenger and WhatsApp are no pushovers either, and are significantly undervalued in analyst outlooks.

FB WhatsApp Facebook MessengerAccording to App Annie, FB owns four of the top 10 most downloaded iOS apps since 2010: Its core app (No. 1), Facebook Messenger (No. 2), Instagram (No. 4) and WhatsApp (No. 6). This does not account for Android, and does not accurately reflect WhatsApp’s 900 million users, implying that WhatsApp would have a much higher ranking than No. 6

All things considered, the majority of Facebook’s growth from this point forward is from better monetizing its user base. It’s not likely to grow users at a rapid rate from this point forward. However, FB is showing signs that it will soon monetize WhatsApp and Facebook Messenger.

Given the size of these networks, that could mean a huge increase in revenue and growth.

The fact that Instagram recently reached 400 million users and is expected to report revenue of $600 million this year and $1.5 billion next year is very telling. It suggests that once FB starts to monetize WhatsApp and Facebook Messenger, explosive growth will occur.

Thankfully, that monetization will come sooner rather than later.

How FB Monetizes WhatsApp and Facebook Messenger

Facebook unveiled the Messenger Platform earlier this year, almost like an app store within an app. It is a way for developers and companies to communicate with customers. While FB hasn’t announced plans for WhatsApp, most analysts and investors expect a Messenger Platform-like service. Such a service should be popular on both Facebook Messenger and WhatsApp since the two apps have a different user base, the former in North America and WhatsApp globally.

Nevertheless, at Tech Crunch Disrupt, Facebook announced how it plans to monetize the Messenger Platform. To no surprise, FB will use advertisements, a new type called “click to message” ads, where businesses can create ads that promote certain products or services and then send those ads to consumers within the Facebook Messenger app. One can only assume that WhatsApp will adopt a similar approach.

Albeit, Facebook Messenger has 700 million users, and WhatsApp has 900 million. These are huge, untapped platforms with user bases that are typically independent of each other. Now that FB has plans in place to monetize Messenger, whether it be with ads or payments, it should start happening soon. And with Facebook having more than $20 billion locked up in WhatsApp, investors have to believe that such moves will come sooner, not later.

With that said, Facebook’s current valuation is a reflection of high expectations, but for next year those expectations are for ad revenue growth of 31.5% and $21.4 billion in revenue. So, if Instagram can generate $1.5 billion with only 400 million users, then I would not be shocked if WhatsApp and Facebook Messenger can do the same in their first years of monetization with a combined 1.6 billion users.

In fact, I wouldn’t be surprised if Messenger and WhatsApp can combine to create just as much revenue as Facebook’s core platform long-term, thereby leading to a significant boost in expectations.

Bottom Line

All things considered, whether FB earns $500 million or $2 billion in its first year monetizing its messenger applications, it will exceed analyst expectations assuming Facebook core and Instagram live up to expectations. If so, those beats likely mean a higher stock price, more impressive year-over-year growth and upwardly revised guidance.

What this means is that Facebook stock — at 33.7 times next year’s expected earnings and 8% off its 52-week high — is a good long-term investment opportunity, if not a great one.

As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.

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