With Facebook Inc (NASDAQ:FB) up nearly 50% this year, it can be tough to get excited about buying Facebook stock. After all, the company is not without notable risk factors.
For example, Facebook’s $2 billion acquisition of Oculus Rift has proven to be a flop. Even though the company has reduced the price tag on the headsets twice this year, the demand has remained tepid. Instead, consumers have preferred alternative devices from HTC and Sony Corp (ADR)(NYSE:SNE). Despite spending hundreds of millions to bolster content, there is still no killer virtual reality app for the platform.
Oh, and something else: There are signs that Facebook is losing the attention of younger users. A recent report from eMarketer forecasts that the number of those between ages 12 to 17 that will use the app in 2017 will come to 14.5 million, representing a drop of 3.4%. Interestingly enough, there has also been the emergence of “Facebook nevers.”
No doubt, such trends are ominous. But then again, they still do not outweigh the many advantages of the company. If anything, Facebook stock is still likely to see sustained growth, and here are three reasons why:
Facebook Stock Advantage #1 – Scale
Size does matter when it comes to social media. And of course, Facebook is the clear leader. Every month, over two billion users visit the core app and about 1.32 billion do so on a daily basis.
Facebook also has built a sophisticated infrastructure to gain insights from the enormous database, such as from interests and demographics. This allows for more effective ad campaigns.
In light of this, it should be no surprise that Facebook stock continues to get a boost from the monetization power. During the latest quarter, revenues jumped by 45% to $9.3 billion and the profits came to $3.1 billion, up 76% on a year-over-year basis.
Facebook’s scale is certainly tough for competitors to overcome. Consider that about 77% of spending on online ads in the U.S. last year came from Facebook and Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG). For the most part, the digital world is a winner’s take all market.
For example, look at how Facebook has used its heft to take on rival Snap Inc (NYSE:SNAP). The company harnessed its Instagram property for the fight, often by knocking off features. In about a year, the Stories part of the app has attracted over 250 million users, compared to Snap’s 173 million. In fact, during the past two quarters, there has been a slowdown in the Snap user base.
Facebook Stock Advantage #2 – Leverage Points
Facebook has been adept in navigating the wrenching changes in the social media industry. About five years ago, the company took swift actions to transition to mobile apps. Part of this was due to strong R&D efforts. But there were also smart acquisitions, such as for Instagram and WhatsApp.
Then over the past couple years, Facebook has been pushing another major transition towards video. This opportunity may be even bigger than mobile. According to Statista, the spending in the U.S. for television advertising is over $70 billion.
As for the Facebook strategy, it involves a blend of user-generated content and premium offerings. It certainly helps that, with $35 billion in the bank, the company the resources to hire talented producers and also to license content (such as from Major League Baseball).
Here’s what InvestorPlace.com’s Laura Hoy has had to say about the initiatives: “The new addition to the social media site offers original video programming that is said to be curated on an individual basis for each user. The cool thing about Watch is that FB already has so much data on each user and what they like to look at that the curated content is likely to be pretty accurately filtered.”
Yet the growth story for Facebook stock is more than just about video. The company also is in the early stages of monetization for WhatsApp and Messenger, which both have over 1 billion users.
Facebook Stock Advantage #3 – Valuation
Not only has Facebook stock posted a standout gain this year, but the past several years have also seen strong returns. Since coming public in 2012, the shares have gained about 350%.
Yet the valuation is still not out-of-whack. Consider that the forward price-to-earnings ratio on Facebook stock is about 26.5X. For the most part, this is reasonable for a company that is growing at a rapid pace and continues to generate strong profits.
Besides, while the past few months have been tough on the mega tech stocks, Facebobk stock has bucked the trend. It’s yet another encouraging sign that the stock should be a core stock holding.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
