Facebook Inc (NASDAQ:FB) stock has long been one of my favorite stocks in the market. The bull thesis on FB stock is pretty straightforward. It is a big growth company. Revenues grew by 47% last quarter, earnings jumped 77% higher, and the user base grew by 16%. It is also a big moat company.
Daily users number 1.4 billion, while the platform has 2.1 billion monthly users, making it the largest social media platform in the world by a mile.
And yet despite having big growth and a big moat, FB stock still trades at a big discount. Its earnings multiple is 50% higher than the S&P 500‘s (31.3x for FB versus 20.4x for S&P 500). But growth over the next several years is expected to be more than 60% greater (17.4% for FB versus 10.7% for S&P 500).
That means FB stock offers you considerably more bang for your buck than the market. Because of that favorable valuation set-up, I like Facebook stock as a long-term holding. But I also think 2018 could be a really special year for Facebook stock for one big reason: Facebook Watch.
Facebook Watch Will Emerge as a Major Video Streaming Player in 2018
Facebook Watch debuted in the summer of 2017 to a considerable amount of fanfare. Investors and analysts alike thought that Facebook would use its giant balance sheet to pump billions of dollars into producing original content, and that Facebook would then leverage its already massive audience to scale the popularity of that original content quite quickly.
But several months later, Facebook Watch hasn’t done much.
Fidji Simo, vice president of product at Facebook, credits this lack of momentum in Watch to the fact that the traditional Facebook News Feed is already full of videos. According to Simo, per Fast Company:
A lot of publishers and creators still have this mental model of the News Feed where only short-form, viral videos work, not realizing that something a little longer can find success on Watch.
That makes sense, but it only is a matter of time before this problem is fixed.
Facebook is appropriately positioning Watch as a valuable tool for content creators to communicate with their audience. As opposed to pushing Watch as a new Netflix, Inc. (NASDAQ:NFLX) or the next YouTube, Facebook is pushing Watch to be a mix of both.
Facebook Watch, much like YouTube, is trying to deliver short-form content that builds deeply engaged communities around niche interests, like knitting, make-up, or sports. But Watch, much like Netflix, is also trying to deliver professionally produced shows.
In this sense, Watch is two parts YouTube, one part Netflix. In that overlap, there is a giant market that has yet to be addressed in over-the-top entertainment. If you want to watch a show on-demand, you will tune to Netflix, but need 30 minutes to an hour. If you want to watch something quick and easy, you will tune to YouTube, but there is a dearth of professionally produced shows on YouTube.
Where can you watch professionally produced shows that run around 15 minutes?
Facebook Watch. As demand for short-form, professionally produced content grows in 2018, Facebook Watch will emerge as a major player in the video streaming world.
The timing is also perfect for Facebook Watch. Because YouTube has come under fire recently for controversial ad placement and is also raising its ad prices by 20% in 2018, there are a tremendous amount of video ad dollars out there that are looking for a new home.
If Facebook Watch more fully incorporates pre-roll video ads, Watch would become a natural destination for most of those ad dollars.
Bottom Line on FB Stock
Facebook Watch will explode in 2018 as the go to platform for short-form, professionally produced video content.
That catalyst should drive undervalued Facebook stock to continue to produce out-sized returns for at least the next 12 months.
As of this writing, Luke Lango was long FB and NFLX.
