Social media giant Facebook Inc. (NASDAQ:FB) has seen its share price rise more than 50% so far this year, but the ride isn’t over yet. With two months left before the close of the year, I think shareholders can expect to see big things from FB stock. The company has what is setting up to be a phenomenal earnings report coming up in November and recently embarked on quite a few new projects that likely will promote long-term growth.
On Nov. 1, Facebook is due to report its third quarter earnings and while there is some concern about how ad revenue will impact revenue growth, I think the company will impress investors with its results.
The firm’s second quarter revenue of $9.3 billion surpassed expectations and translated into impressive year-over-year growth of 45%. However, management also cautioned that the third quarter revenue figures might not be quite as rosey as advertising growth starts to plateau and contributes less to the firm’s overall revenue growth. Facebook guided revenue growth of around 40% from the same period last year, still a respectable figure but lower than what investors have come to expect in previous quarters.
While we might see Facebook’s revenue growth come in a little lower this quarter, I think the fact that FB has already warned about the dip will likely ease some of the concern. There’s also a chance that management’s cautious predictions will create another revenue beat, something that might actually cause the stock to rise.
There’s also the fact that FB stock price hasn’t risen much over the past three months. Since its previous earnings report, Facebook’s share price has only gained about 5%. That’s not much when you compare it to the S&P 500’s more than 3% rise during the same time period. That suggests that investors haven’t priced in good third quarter numbers, so positive results will likely take the stock reasonably higher.
Long Term Growth Prospects
While I think FB stock price today is lower than it will be following its third quarter results, the real reason to add Facebook to your portfolio is the long-term stability and growth that it offers, a rare combination especially in the tech space: Much of Facebook’s stability comes from its size.
Facebook’s monthly active users surpassed the 2 billion member benchmark which is huge considering that competition in the social media space has grown significantly over the past decade. What’s more is that, so far, it appears that user numbers growth isn’t slowing.
Having so many people tied in to the Facebook platform works for the company in two ways. First, with every additional person that joins, a stronger network effect is created. For example the more people who sign on to Instagram, WhatsApp or Facebook, the more reason non-users will have to join themselves.
Secondly, it makes Facebook’s platform a mecca for businesses and advertisers. Not only is roughly one in every four people on Earth reachable via Facebook, but they are also easily grouped into target markets by a variety of demographics. People are increasingly interested in social selling and word-of-mouth via social media is a powerful marketing tool.
Facebook has been taking advantage of its position at the top of the social media hierarchy by adding new services that will not only increase space for ads, but promote social selling. Most recently, Facebook has added a food delivery option that allows people to order from restaurants recommended by their friends right from the FB platform. The firm has also optimized its messenger service so that businesses can use it as a way to communicate with their customers.
The Bottom Line
Facebook has proven that it can fend off attacks from advancing competitors while still growing and changing with the times. The company has already grown into the number one social media site on the planet, but it has further to reach as it builds out its video streaming, messaging and social selling offerings. Investors who buy now are likely to see a pop after the firm releases its third quarter earnings, but in the longer term, FB stock price is likely to continue rising.
As of this writing, Laura Hoy was long FB.