Buy Facebook Stock Because Its Commerce Future Is Bright

Facebook (NASDAQ:FB) stock has bounced around over the past few years. In 2017, FB stock rallied as the consensus thesis was that FB was transforming into a permanently dominant player in the continuous-growth digital-ad industry.

With All Its Controversies and Missteps, Is Facebook Stock Worth It?

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But in 2018 that thesis was called into question amid a flurry of data-privacy scandals, which sparked harsh consumer and regulator backlash. FB stock dropped in response to the scandals. FB has rebounded in 2019, as it has moved past those data-privacy concerns and maintained its dominant position in the digital-ad world.

Amid this wild roller-coaster ride, it is natural for investors to ask: what’s next? Will Facebook stock stay in rally mode? Or will it retreat again?

The answer is clear. Facebook stock will stay in rally mode. But the rationale for that conclusion  is not clear. The reason that FB stock will stay in rally mode has very little to do with its advertising business, which has been the heartbeat of Facebook for the past several years. Instead,  FB stock’s next leg higher will be driven by the company’s big push into commerce.

The thesis is simple. Around 2.7 billion people interact with Facebook’s ecosystem everyday. Right now, Facebook monetizes those people through ads. But, when you have 2.7 billion people interacting with each other and brands in your ecosystem every month, it is very easy to also throw in a commerce component, and turn those 2.7 billion pairs of eyeballs into 2.7 billion shoppers. By doing that, Facebook can dramatically increase its addressable market and expand its long-term opportunity.

The improvement in FB’s results that will be triggered by this commerce push is not priced into FB stock today, giving investors a golden opportunity to buy into a high-growth stock at a very reasonable price.

Investors should buy FB stock because FB is going way higher in the long-run.

Facebook’s Push Into Commerce Is Inevitable

As a backdrop, it’s important to understand what’s going on with Facebook’s ad business. FB is a giant in the global-digital-ad world. That’s naturally what happens when you have 2.7 billion people in your ecosystem; you attract ad dollars seeking the attention of those 2.7 billion pairs of eyeballs.

That business is doing just fine. It’s growing at a 20%-plus pace. But its  growth is slowing. That isn’t Facebook’s fault. The whole digital-ad market is slowing. We are talking about a market that’s going to go from 20%-plus growth in 2018 to single digit growth by 2023, mostly because more than 50% of ad dollars have already migrated to the digital channel.

In other words, the runway for growth in the digital-ad industry is slowing, so  digital ad growth rates across the whole industry, including Facebook, are falling. FB is looking for a way to combat this slowing growth trend.

Fortunately, it’s stumbled upon one very promising opportunity: commerce. Facebook’s suite of apps is the online version of the world’s “town square,” s it’s a natural place for commerce to take place. Consumers are interacting with each other and with brands very often through Facebook’s platforms. Consumers are also learning about brands, products, services, places, experiences, etc. Layering commerce on top of those already naturally occurring dynamics is an easy thing to do.

Consequently, FB is pivoting full-force into commerce. It’s launched Marketplace,an e-commerce platform. FB has also partnered with Shopify (NYSE:SHOP), and it’s looking into building a native currency. Inevitably, all these growth initiatives will one day enable FB to become an e-commerce hub.

FB’s Commerce Business Will Be Huge

Facebook’s push into the commerce world could be the beginning of something huge. Facebook’s e-commerce business could eventually be nearly as big as its digital-ad business.

About $280 billion were spent on digital ads last year, and that’s projected to rise to $500 billion-plus in 2023. On the commerce side of the ledger, $2.8 trillion were spent on e-commerce last year, and,  by 2021, that’s expected to jump to nearly $5 trillion. In other words, the e-commerce-addressable market is about ten times the size of the digital-ad-addressable market.

With 2.7 billion people in its ecosystem, FB doesn’t need to turn all of its users into shoppers in order to have a huge commerce business. Let’s say only 1 billion users eventually utilize Facebook for e-commerce  in one form or another. Let’s also say that the average annual spending on Facebook for those 1 billion users is about $500, or about 20% of total online per capita spending. That would translate into $500 billion in gross merchandise value. Assuming Facebook takes a 5% cut, that’s  $25 billion of e-commerce revenue for FB.

The company’s digital-ad business generated revenue of $55 billion last year.

Thus, through e-commerce alone, Facebook has an opportunity to drive nearly 50% revenue growth over the next several years. That growth will be on top of the double-digit-percentage-annualized growth of the company’s digital ad business. All of its revenue will carry  high margins.

Facebook’s revenue and profit look poised to continue growing rapidly for the foreseeable future. Trading at just 20-times its forward earnings, FB stock is dirt-cheap, considering its robust profit growth potential at this point.

The Bottom Line on FB Stock

Facebook stock has been on a wild roller coaster ride over the past several years. The next move in this stock will be another leg higher, powered by the company’s big push into commerce. As that push unlocks tremendous long- term value, investors will buy into the recharged growth outlook, and FB stock will move higher.

As of this writing, Luke Lango was long FB and SHOP.

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/buy-facebook-stock-because-its-commerce-future-is-bright/.

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