Social media pioneer Facebook Inc (NASDAQ:FB) has been a market darling over the past year with investors flocking to the company in droves. Since going public in 2012, FB stock has increased 215%, making it an expensive addition to investors’ portfolios.
Facebook recently released better-than-expected third-quarter results, but you’d never know it by looking at the FB stock price. Instead of sending the stock soaring, Facebook’s Q3 beat did very little to encourage investment and sent the stock down nearly 6% in trading on Thursday.
Even after Thursday’s post-earnings selloff, Facebook shares trade at 58 times earnings with a price tag of $120 per share. But many who thought they’ve missed the boat on FB can’t be faulted in wondering if now is a good time to get in.
It very well could be.
FB Stock’s Growth Is Far From Over
One of the biggest concerns among investors is whether FB stock will continue to grow at such an impressive rate. While it’s true that FB’s rise to becoming the most popular social media site was a lucrative one, the social network still has plenty of room to grow.
Facebook has only just begun to make money from WhatsApp, a service that is likely to deliver a massive revenue stream once it has been monetized.
Between WhatsApp and Facebook’s own Messenger service, the firm controls the two most popular mobile messaging services in the world. That’s a huge competitive advantage for FB and it represents a massive revenue growth opportunity considering that the company hasn’t done much to profit from the two yet.
Users Breed More Users
Speaking of competitive advantages, Facebook’s huge active user base is a force to be reckoned with. Between Facebook, Instagram and WhatsApp, the company has a powerful network effect. Every person that signs up for one of the services is an incentive for their non-user friends to join as well. Because FB has been building this network for years, it is a powerful force that makes it difficult for competitors to break.
Another concern for investors is Snapchat. The wildly popular disappearing message service has rapidly sucked in a great deal of millennial users, leaving some to question whether the firm will have enough momentum to knock FB stock down once the company goes public.
Snapchat is rumored to have an impending IPO, which will give the company more flexibility and resources to help it grow. While this is a threat to Facebook’s dominance in the social media space, it’s unlikely to let Snapchat’s advances go unanswered.
Facebook has been working on replicating Snapchat’s success by adding its own filtering options and creating a disappearing message feature similar to Snapchat. Facebook also rolled out Instagram Stories, which allows users to post photos and videos that expire after 24 hours earlier this year.
What About the Guidance?
Facebook’s most recent earnings release offered investors a lot of upside — it announced an earnings beat, monthly active users gained 16% over the past year and daily active users rose 17% over the same period.
So why did the FB stock react poorly? Some of the reason for the response to FB’s earnings was the market’s underlying uncertainty due to political and macroeconomic conditions. Another contributing factor, however, came from the social network’s lackluster 2017 guidance.
Facebook warned that next year’s revenue growth will slow considerably, and that ad revenue growth will be muted as the company stops increasing the number of ads users see in their news feeds.
These factors are certainly concerning, but it’s important that investors look past the headlines to consider why FB is issuing this guidance. The Menlo Park company is planning to make 2017 a year heavy in investments — building data centers and recruiting new talent.
The slowing ad growth is to be expected as Facebook newsfeeds reach a saturation point for new ads. It’s important, however, to consider that ad sales aren’t the only way the company plans to make money moving forward.
Facebook has been working on several other revenue streams that may step up in the coming years, including Workplace, a Facebook application for companies that will charge a subscription fee, and WhatsApp messenger. FB is also building out its name in the virtual reality space, an industry that many see becoming the next big thing.
FB stock is expensive, sure, and it doesn’t come without its own unique risks, but its ability to grow and change is undeniable. While the stock’s track-record for success might be off-putting to some, FB stock’s growth potential makes it a worthy buy.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
