Facebook (FB) stock has had an impressive run over the past year, rising some 36%. Facebook is now the eighth-largest public company in the world by market capitalization; FB is valued at some $323 billion. This is more than tried-and-true blue-chip stocks like General Electric (GE), Johnson & Johnson (JNJ), and AT&T (T). Yet Facebook is a relative newcomer, only 12 years old. Does this valuation make sense for Facebook?
Let’s look at the pros and cons of buying Facebook stock.
FB Stock: Pros
Video Streaming: Facebook is looking to steal revenue from YouTube and television by moving more towards video. Facebook is threatening television with its video streaming service, Live, and challenging YouTube by adding a video hub and video search engine.
Last year, Facebook video views doubled from 4 billion a day in April to 8 billion a day in November. 500 million viewers watch 100 million hours of video on Facebook every day. With so many views daily, there is room for FB to keep growing ad revenue. James Cakmak of Monness Crespi & Hardt sees Facebook taking advertising revenue from television ad budgets as time goes on.
Strong Position: Facebook has 1.59 billion users, meaning that over 1 out of every 5 people on the planet have Facebook accounts, or about one half of the 3.2 billion internet users worldwide. With so many users, it will be difficult to see how any challenger could dethrone Facebook as the leader in social media. This massive network effect should help to propel FB stock for years.
As a social network, Facebook benefits from having so many users. The value of Facebook to its users increases as the network grows larger. If all your friends use Facebook, you will be more likely to create an account on Facebook.
Alphabet (GOOG, GOOGL), which owns YouTube and Google, Yelp (YELP), and Twitter (TWTR) may rival Facebook in one or more business lines — social networking, videos, search, messaging, or restaurant reviews — but Facebook combines all of these in one platform.
Rapid Growth: Facebook revenue, earnings and users are all growing at double-digit rates. Last year, revenue at FB increased from $3.85 billion to $5.84 billion, and profits passed $1 billion for the first time, at $1.56 billion, up from $701 million. The number of monthly active users grew 14% year-over-year, and there were 934 million daily users, a 25% increase from the year before.
FB stock posted an EPS of $2.28 last year, but by 2018 this is expected to top $5.50. Increasing mobile penetration in the developing world means that Facebook has plenty of room for growth, so FB stock may continue rising. When more people get internet access, they will be able to create Facebook accounts; if everyone had access to the Web, this would mean 3.5 billion users worldwide, given Facebook’s current penetration rate.
FB Stock: Cons
Decline in Sharing: While Facebook appears to be growing fast, there may be some problems ahead. Facebook users are posting less and sharing less original content than before. Instead of personal stories, users are mainly sharing news and information. Sharing of original posts last year declined 21% y.o.y, while total sharing declined 5.5%. Mark Zuckerberg is concerned with this, and has been holding meetings to find some way to reverse this trend. This decline may be the reason Mark Zuckerberg is so focused on Live.
Valuation: The strongest argument against buying FB stock may simply be that the stock trades at such high multiples that years of rapid growth may already be factored into the share price. Facebook stock trades at 85 times earnings and 26 times forward earnings, and a staggering 18 times sales.
While Facebook may have a lot of room for growth, the market clearly is expecting a lot. Failure to keep up with the high pace of growth will definitely hurt FB stock. Facebook may be an exceptional company, but can it keep up with this torrid pace of growth? Or will it fall off the expectations treadmill?
Snapchat: While Facebook does enjoy a dominant position as the leading social network, there may be some competition up ahead. Snapchat appears to be more popular among teens. In a Piper Jaffray survey, 75% of teens reported using Snapchat, while only 59% used Facebook. Users are also more likely to share personal content on Snapchat since Snapchat has a younger demographic.
This is perhaps an inevitable consequence of FB acquiring so many viewers; with more friends, they will be less willing to share personal matters. Young people won’t want their family members or employers to see their silly pictures and videos, so they use Snapchat to share these.
Snapchat is also rivaling Facebook as an online video platform, with both receiving 8 billion daily views, a fivefold increase from the year before. Snapchat’s Chat 2.0 messaging app is also taking on Facebook Messenger and WhatsApp (which is owned by Facebook).
Facebook Stock: Verdict
Both the cases for and against buying Facebook stock seem strong. The company is growing quite rapidly, but shares trade at a high multiple so growth may already be priced in.
Is buying FB stock a good idea?
Tech leaders seem to be dethroned at a rapid rate, and the champion today may just be an also-ran tomorrow. Myspace was dominant as a social network less than a decade ago, but today it is second-tier; most users have migrated to Facebook. AOL (AOL) once was the king of the internet, but today is a minor player.
Buying Facebook stock at current prices is risky given the high valuation; investors should wait for a pullback before they consider buying.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.