The latest tech sell-off has had mostly a temporary impact on Facebook Inc (NASDAQ:FB). In fact, most of the losses have been recouped. And yes, for the year so far, FB stock investors have a lot to cheer about. The return has come to an impressive 55%.
This performance has been better than other top tech operators like Alphabet Inc (NASDAQ:GOOGL), Apple Inc. (NASDAQ:AAPL) and Netflix, Inc. (NASDAQ:NFLX). Granted, the FB stock price is not without its issues and risks.
Keep in mind that the company has fumbled with its response to the emerging trend of “fake news,” especially in connection with Russia. The result has been scrutiny from the federal government. But there have been other problems.
For example, despite shelling out $2 billion for Oculus, the foray into VR (Virtual Reality) has been a big disappointment. FB has had to cut the price several times on its headsets and has yet to produce any killer apps. Yet such problems are really not too serious.
For the most part, FB still looks like a pretty solid play right now for growth areas like messaging, social media and video. So let’s see why:
FB Stock Advantage #1 – Powerful Moat
InvestorPlace.com’s Josh Enomoto calls FB a “rock-solid fortress.” This is certainly an apt description. According to the latest earnings report, FB has close to 2.1 billion MAUs (Monthly Active Users) and 1.4 billion DAUs (Daily Active Users).
But the company’s other apps have massive user bases as well, with WhatsApp and Messenger at over 1 billion. And as for Instagram, it is over 500 million DAUs. This scale is incredibly important since the ad market can be brutal. Advertisers want the ability to target large audiences across various demographics.
They also want the ability for precision targeting. No doubt, FB is standout with all these factors. When it comes to digital advertising, the market is actually turning into a winners’ take most situation.
Note that FB and GOOGL are expected to take about 63.1% of all the spending in the U.S. (this is based on data from eMarketer). As a result, it should be no surprise that many social media and digital properties have struggled to gain ad revenues, such as Twitter Inc (NYSE:TWTR).
FB Stock Advantage #2 – Growth
Even with its large size, FB has been able to continue to grow at a hefty pace. In Q3, DAUs and MAUs both jumped by 16%. To put this in perspective, this means adding over 320 million users on an annual basis!
A key to the growth has been a clear vision for the company, in terms of focusing on communities and collaboration. Such themes are prevalent throughout the company’s apps.
This has definitely been a big help with the video initiatives. According to Mark Zuckerberg:
“[W]atching a video is just a passive consumption experience. Time spent is not a goal by itself. We want the time people spend on Facebook to encourage meaningful social interaction. So we’re going to focus our products on all the ways to build community around the videos that people share and watch. That’s something Facebook can uniquely do.”
But it is important to keep in mind that several of FB’s apps, such as WhatsApp and Messenger, are still in the early stages of monetization. These platforms provide not only the potential for substantial ad revenues but also ecommerce streams. Note that over 20 million businesses are using Messenger to connect with customers.
FB Stock Advantage #3 – Financials And The Valuation
Since its IPO in 2012, FB stock has gone from below $20 to $179, with the market cap now at $520 billion. Given this great performance, it’s natural that investors may think FB stock is expensive. But based on traditional metrics, it is not.
The forward price-to-earnings multiple is currently at 27X, which actually seems dirt-cheap when compared to the sizzling growth rate. During the latest quarter, revenues jumped by 47% and net income soared by 79%.
In fact, even if the growth rate were cut in half, which seems unlikely for the next few years, the stock would still be a solid value, especially in today’s pricey market.
Tom Taulli is 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.
