Facebook (NASDAQ:FB) is having a tough time convincing its investors that business is strong and that its shares should not be languishing near yearly lows. The opposite is happening: even though the company reported strong third-quarter results, a thriving community and a healthy business, the stock drops on any negative news. When will FB stock stop falling? Should investors just ignore the noise and hold the stock for the long-term?
In the third quarter, Facebook said that 2.3 billion people use Facebook monthly (also known as “MAU” or monthly average users) and 1.5 billion visitors daily. Revenue, at $13.7 billion, grew by one-third over last year. That is an astonishing rate of growth.
Whether to mix up or to improve on its transparency, Facebook is now reporting the usage of all of its apps, not just the Facebook app. When all apps — Facebook, Instagram, WhatsApp and Facebook Messenger — are tallied, the company had 2.6 billion users on those apps in the month and 2 billion each day.
Clear Strategy for FB Stock
It seems like not a day goes by when the media doesn’t attack Facebook over security breaches or its role in swaying opinion in elections.
Beyond all of this, management has a strategy for navigating challenges and opportunities. The first is connecting people through their use of private messaging and stories. That will grow the community over time. Private messaging and content sharing growth will cut the mounds of publicly shared posts but benefits connections as a whole because those who want to share only to their close connections will continue using the Facebook platform. On Messenger, people now send 100 billion messages daily. Links, photos and videos are shared more on WhatsApp and Messenger than on social networks.
Growing video content sharing is the second strategy for growing user engagement. The company is still far behind Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and its YouTube property. YouTube already launched a premium service to monetize its video-sharing site but Facebook still has plenty of work ahead in offering a unique people-centric experience.
Beefing up security and improving user safety is Facebook’s third strategy that, unfortunately, will put a strain on profit margins in the near-term. The unknown costs might explain why the stock is underperforming. Investors have no idea if this initiative will be done in a few quarters or if it will take years.
Apple iMessage a Competitor
Given that WhatsApp and Messenger are paramount to Facebook’s growth, the company recognizes iMessage, from Apple (NASDAQ:AAPL), is its biggest competitor. By default, Apple devices set iMessage as the texting app, yet in plays where Apple faces more competition from Android, people are more likely to use Facebook’s services.
WhatsApp’s end-to-end encryption, even in China, gives the messaging app an edge over Apple and other chat app services. So, as Facebook invests more in security across its Facebook platform, this will benefit users, improve their user experience, and increase user trust for Facebook.
Immediate Challenge
Facebook definitely has its challenges.
Stories is gaining traction with its users — people share over 1 billion of them a day — but is not making enough money from ads. The company is still in the early phases of developing ad products on Stories. Investors should anticipate that for now, Stories will not have many ads posted.
First, FB stock needs to draw more users and improve user engagement before monetizing the medium.
Valuation Considerations for Facebook Stock
Facebook’s expenses grew 53% to $7.9 billion in the third quarter. Its employee base of 33,600, up 45% year-on-year, is a “good” cost because it signals that the company is still growing. Operating margins were at a healthy 42%. The company generated $4.2 billion in free cash flow and had $41.2 billion in cash and investments. The company bought back $4.3 billion worth of shares in the period.
Looking ahead, Facebook is forecasting revenue growth decelerating to the mid-to-high single-digit percentages. Although usage is growing, this is happening ex-North America, where ARPU (average revenue per user) is lower. Initiatives to beef up data privacy is hurting pricing growth. And as Facebook shifts its attention to Stories, which has a lower profit, the company will underperform for a while.
Your Takeaway
Facebook stock will face selling pressure as markets edge lower, but this is unjustified. The social networking firm is strong, it trades at reasonable valuations relative to growth and the company has a healthy balance sheet. Analysts, on average, have a $190, or about a 32% upside target, on the stock. When the bearish sentiment in markets winds down, Facebook could get back up there.
As of this writing, Chris Lau did not own shares in any of the companies mentioned.
