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Why Facebook Inc (FB) Stock Can Still Run Much Higher

FB reported another great quarter, affirming the company's dominance in the social networking world

By Chris Lau, InvestorPlace Contributor

http://bit.ly/2embrQ2

Facebook Inc (NASDAQ:FB) just keeps growing. The social networking giant commands billions in daily active users and billions more in monthly users returning to the site. FB’s second-quarter revenue reaffirmed the site’s dominance in online social so much that shareholders need only wait for dips to add to the position.

Why Facebook Inc (FB) Stock Can Still Run Much Higher
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FB reported that over 1.3 billion people login to Facebook daily and 2 billion are on the site monthly. This led to the company generating $9.3 billion in revenue in the second quarter, up 45% from last year.

To sustain that impressive growth rate, the company is turning its efforts towards community building. Over 100 million users belong to a group on Facebook. By building a support structure around interests and causes vis-à-vis groups, expect that users will come back to the site regularly.

Building communities are mutually beneficial for the company and the users. FB builds the technology that matches groups to users, enhancing the online experience. In return, users become more active on the site, increasing the chances they will interact with the advertising posted on the feed.

Facebook’s Growth Rests in Mobile and Video

Mobile is still the dominant medium for ad impression growth. Last quarter, the average price of ads increased nearly 25% as impressions grew 19%. This is due to ads on mobile feeds on both the Facebook and Instagram site.

FB warned that desktop ad revenue will continue dropping, especially in the second half of 2017. Ad-blockers are a primary reason for the slowdown on the PC desktop. Unfortunately, driving user engagement with mobile video may cause ad impressions to slow. Facebook forecast an overall slowdown in the growth rates for ad engagement.

For video content, Twitter Inc (NYSE:TWTR) found success in boosting user activity when it posted live video from football games. FB will do the same with Live Video Search. These days, users have high-powered smartphones that are running on a fast data plan. That suggests live video sharing will increase the time spent on the site.

On the Instagram property, Facebook is competing against Snap Inc (NYSE:SNAP) with success. Instagram Stories keeps its users engaged. Shared videos and photos that disappear are encouraging users to return to the app sooner and more often. As video sharing on Instagram grows, user engagement numbers will keep getting better. Advertisers like the numbers they see and Facebook gets to sell advertising space to them.

FB: Instant Messaging Is a Drag

WhatsApp and Facebook Messenger are chat apps that put a drag on the company’s results. Chatting has a different user dynamic: Content is not shared through a news feed. So even though WhatsApp has impressive usage statistics of 1 billion daily users, Facebook cannot make money from it just yet.

For now, that is OK for shareholders to accept. FB stock is at a 43x price-to-earnings ratio and a 26x forward P/E. The stock is not so expensive that Facebook is in any rush to push ads on its chat apps. Management pointed to the potential of live video sharing for attracting advertisers. It is simply not feeling any rush to make money from WhatsApp and Facebook Messenger at this time.

Bottom Line on FB Stock

Facebook continues to dominate the social networking landscape. Instagram is proving a savvy acquisition and it will offset any user dis-interest on the main site. One thing is very clear in the advertising space: Spending on social sites keeps growing, displacing traditional media. This permanent trend will ensure that Facebook grabs a bigger portion of the advertising pie over time.

Furthermore, Snapchat’s near-term struggles and Twitter’s failure to grow its user base will only benefit Facebook stock.

FB stock continues to suit both value and growth investors. The stock has a modest forward P/E for a company whose revenue growth is sustainable. The same cannot be said for Twitter or Snap.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/facebook-inc-fb-stock-run-higher/.

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