Global Saturation Poses a Challenge to Facebook Stock

FB may have to start trying to entice different types of investors to buy FB stock

Concerns about Facebook’s (NASDAQ:FB) alleged lack of respect for its users’ privacy is in the news again.  But Facebook’s user base continue to grow and Facebook stock is still on an upward trajectory, indicating that average people don’t care about the negative headlines.

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However, at this point, almost anyone who can get a Facebook page now has one. That means FB’s  growth will decelerate unless it either better monetizes its flagship site or generates more revenue from its other websites and apps.

Privacy Concerns Are No Longer Affecting Facebook Stock

Earlier this week, Facebook COO Sheryl Sandberg was on Capitol Hill lobbying for new laws to protect Facebook’s users in the U.S. Meanwhile, the Federal Trade Commission (FTC) is preparing to fine FB up to $5 billion over its alleged failures to protect users’ data during the 2016 election. Lately, there’s also been some coverage  of Facebook’s decision to ban certain controversial people from the website.

Yet the vast majority of users don’t care about these issues, so FB stock has not been meaningfully affected by them.

Amid the controversy, FB remains the go-to platform for keeping tabs on family and friends or spouting off political views. Complaints about banned users have done little to slow FB’s growth or negatively affect FB stock.

Facebook’s Flagship Site Can’t Grow That Much More

The Facebook platform has attracted 2.38 billion people, a staggering number considering 3.2 billion individuals had internet access as late as 2015.

Going forward,  FB will have to rely primarily on Instagram, Messenger, WhatsApp, and other lines of business to boost its growth and raise FB stock.

Facebook Stock Still Looks Poised to Advance

But I think Facebook stock will continue to move higher over the long-term. With its cash hoard of over $45.24 billion as of its last quarterly report. FB can buy a great deal of growth.

However, Facebook faces the same challenge  that plagues Coca-Cola (NYSE:KO) and McDonald’s (NYSE:MCD): How does a company continue growing when it can no longer expand to new markets?

Coca-Cola attempted to solve that problem by launching new drinks,   while Facebook has tried to address it with new apps.  Many of FB’s acquisitions have performed quite well. Instagram now boasts over 1 billion users. Among young people, Instagram continues to take market share from Snap’s (NYSE:SNAP) flagship app.

In the realm of international calling, WhatsApp, with its free calls to anywhere in the world, can take business from telcos. Moreover, competition from Twitter (NYSE:TWTR), Pinterest (NYSE:PINS), and other platforms do not pose a direct threat to FB or Facebook stock.

Facebook Stock May Have to Follow KO’s path

Over the next five years, analysts, on average, forecast that FB’s average annual earnings growth rate will be 17.55%. That should support the current price-earnings ratio of Facebook stock, which is just over 28.

Still, advertising,  which provides the bulk of Facebook’s revenue, is becoming more competitive. Furthermore, if the multiple of Facebook stock moves much higher, FB stock could tumble again.

Due to its current size and long-term growth prospects, Facebook stock will gradually become more similar to Coca-Cola stock. Interestingly, KO stock has a similar PE ratio, but KO’s profit growth is much lower than that of FB. However, unlike Facebook stock, KO stock pays a dividend. It has a dividend yield of about 3.25%, and its dividend has increased annually for the last 56 years.

Facebook should consider a similar approach. If Facebook stock continues to struggle, its current crop of investors will sell their shares. But by attracting dividend investors, FB would entice a group of investors who previously would not consider owning FB stock.

The Bottom Line on Facebook Stock

Facebook may have to adopt  a new approach as its flagship site approaches global saturation levels. Despite privacy concerns and looming fines from countries, people continue to log on to its flagship site and its other apps. Furthermore, the company has  become adept at monetizing its other apps, enabling its profit to grow.

However, there is increased competition in the ad space. Moreover, both FB’s size and its relatively limited growth prospects put FB in the same position as Coca-Cola. To meaningfully boost FB stock, FB may have to follow KO’s lead and initiate a dividend.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


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