This year has been a volatile one for most U.S. companies as markets stumbled on concerns about oil and weaker-than-expected economic data.
However, social media giant Facebook Inc (FB) has weathered the market turmoil relatively well, posting gains of more than 4% since the beginning of January and outperforming the S&P North American Technology Sector Index, which has lost 6.7% so far this year.
There’s no question that Facebook stock is a solid investment, but at $108 per share and a price-to-earnings ratio of 84, there is some concern that the company is too expensive.
While it’s true that FB isn’t a cheap buy, the company’s shares have come down in price since the beginning of the month, and much of their hefty cost is justified by the firm’s solid growth potential.
Ad-Revenue Growth Potential for Facebook Stock
The company has become much more than just a social media firm in recent years — dabbling in everything from drones to virtual reality.
Facebook stock has the potential to deliver another strong performance this year due to the company’s focus on keeping ad revenue coming in. And in the longer-term, the firm’s many ventures are likely to keep FB relevant as times change.
Looking at ad revenue, the firm’s impressive daily active user base presents a strong case for continuing interest from advertisers. On its fourth-quarter earnings call, Facebook reported that its monthly active users had risen to 1.59 billion and mobile users were up to 1.44 billion.
This impressive user base growth is music to marketers’ ears, especially considering that Facebook is implementing new features that will provide more accurate data regarding how people receive information on the site.
Facebook recently rolled out Reactions on a global scale. The feature allows people to react to content using emoji’s rather than just “likes.” At the moment, the new option is simply aimed at improving users’ experience, but FB could eventually leverage reactions to better tailor News Feed items and provide marketers with more data regarding their ads’ reception.
Another big reason to believe Facebook will keep the advertising dollars rolling in is Instagram. The photo-sharing website boasts more than 200,000 advertisers — impressive considering the site only began selling advertising space last September.
That figure is likely to continue growing as more marketers look to share content on Instagram. Because of the site’s layout, advertisements blend better with normal content.
So far, Instagram’s advertising appears to be a massive success, with 60% of the site’s users claiming they have heard about new products or businesses on the site, and 75% saying they’ve taken action after viewing an Instagram post.
Future Growth Catalysts for FB Stock
FB’s established revenue streams through advertising aren’t the only reasons to invest, though. The company’s upcoming projects are worthy of investors’ attention as well.
Both of the firm’s messaging apps, Messenger and WhatsApp, have the potential to catapult Facebook stock higher as the firm looks for ways to monetize the two.
Rumor has it that CEO Mark Zuckerberg is planning to roll out ads within the Messenger app, but without damaging the user experience. While Facebook has been tight-lipped about its monetization plans, many are expecting FB to allow companies to advertise to users who have contacted them within the app. That most likely means they will be allowed to send messages announcing new products and sales or providing coupon codes to anyone who initiated contact with them via Facebook messenger.
That way, users aren’t inundated with irrelevant ads, but companies can still use the app to stay in touch.
Virtual reality is another space that Facebook has been establishing a foothold in — a good sign for long-term investors. When people shifted to mobile browsing rather than using desktop computers, Facebook struggled to keep up. However, the firm appears to have learned from its mistakes and is hoping to stay on top of the next shift.
Virtual reality is expected to grow exponentially over the next few years and Facebook’s Oculus VR acquisition will keep the site on top of the trend.
Another big project that could reap massive rewards is Facebook’s pledge to connect the unconnected with Free Basics. The service allows people in places where infrastructure is limited to have access to a watered-down version of the Internet — complete with Facebook access.
By unlocking the Internet for new users, Facebook is likely to increase its user base by exposing people to its service during their first experience with the web. This will keep the firm’s active user base growing and expand its reach across the globe.
The Bottom Line for FB Stock
Facebook stock is an expensive buy, but its decline in February makes it a bit more attractive.
Not only that, but for long-term investors, the company’s price tag can be justified when you look at all the growth potential.
As of this writing, Laura Hoy was long FB.
