Facebook Inc (NASDAQ:FB) stock sits just off an all-time high, despite a few reasons for concern in the core Facebook platform. After Q4 earnings last week, the company reiterated guidance for slowing growth in 2017. Expenses are expected to rise next year as well.
Several times in the past two years, Facebook admitted to measurement errors in its advertising, notably in video, which is supposed to be a major driver of revenue growth for FB stock going forward. And rival Snap is getting several billion in cash from its upcoming IPO to support its own growth opportunity.
Investors have shrugged off those concerns, however. For one, FB stock is reasonably cheap, trading at roughly 24x 2017 consensus earnings-per-share. More importantly, Facebook stock no longer is quite as reliant on the company’s primary platform. Other properties like Instagram, Messenger, WhatsApp and Oculus have potential on their own.
So when analyzing FB stock, it’s important to consider the value of the businesses beyond the namesake platform. Even with Facebook stock at a $380 billion market cap, the other businesses are becoming big enough to matter.
Three FB Stock Drivers
It’s easy to forget at this point, but Facebook stock dropped like a rock after its 2012 IPO. FB actually fell by half in a few months, due to skepticism about its long-term viability.
Part of the pressure also came from FB’s $1 billion acquisition of Instagram. Many investors intensely disliked the deal, which valued each Instagram user at about $28. Instagram had no revenue and just 13 employees; the price tag had echoes of the dot-com bubble.
No Facebook stock investor is complaining any more. FB stock trades at over 7x its all-time low, and Instagram is part of the reason why. Facebook still doesn’t give a ton of detail on Instagram, but analysts have estimated the business generates over $3 billion in sales. A Forbes cover story in April cited a
$50 billion valuation for Instagram; other analysts have estimated $35 to $40 billion.
To be sure, those estimates could be wrong. And Instagram Stories is Facebook’s most direct competition with Snapchat — and thus the most vulnerable if Snapchat continues to grow. But it still looks like CEO Mark Zuckerberg got a heckuva deal with Instagram, which now supports a decent portion of the overall valuation of FB stock.
Facebook paid $19 billion for WhatsApp in 2014, but the true cost actually has been higher than that. Most of the payment for the company was paid in FB stock. Worth about $15 billion at the time, those Facebook shares now are valued at closer to $35 billion.
From a user standpoint, WhatsApp continues to be a success. According to the Q4 conference call, monthly users have exceeded 1.2 billion. WhatsApp hit the 1 billion milestone in February, which implies a roughly 25% growth rate in users this year.
From a revenue standpoint, WhatsApp’s positioning isn’t nearly as clear. The company did away with a $0.99 annual subscription fee (after the first year) in early 2016, and monetization appears to remain an issue in the wake of that decision. At the time, WhatsApp said in a blog post that it was testing ways for businesses to use the platform to communicate with customers, but not necessarily traditional advertising.
Like Instagram, WhatsApp revenue figures aren’t broken out, and for now, the business remains based on potential. It wouldn’t take much on a per-user basis to make the business a major contributor: $5 per user per year would imply $7 billion or so in sales by the end of the decade, and likely a few billion in annual profit.
How WhatsApp will get to those levels still isn’t exactly clear, but investors would be wise not to bet against Facebook finding a way.
Messenger
Like WhatsApp, it’s not exactly clear how FB plans to monetize Messenger. Zuckerberg did say on the Q4 earnings call that Messenger’s “expressive and rich environment” provided a wider range of options for advertising than WhatsApp, and Facebook continues to test possible revenue sources.
User growth here is solid as well. The platform hit one billion users in July, not terribly long after Facebook required the separate app for mobile messaging. In terms of monetization, Messenger likely is further along than WhatsApp, however. As of Q3, there were 33,000 “chatbots” built by businesses to communicate with current and prospective customers. There’s likely a way to get some sort of commercial revenue from those chats, in addition to possible in-app and/or traditional display advertising.
Bottom Line on Facebook Stock
It’s highly unlikely, even with over a billion users a piece, that either Messenger, WhatsApp, or Instagram will eclipse the legacy Facebook platform. And it is unclear exactly how – or when – Facebook can drive revenue from its non-Facebook products. Facebook also has its Oculus business focusing on virtual reality, though its most-notable contribution so far has been a $500 million judgement in a patent case settled last month.
But it’s important to understand these platforms as potential drivers for Facebook stock. Assuming Instagram is worth $35-$40 billion, WhatsApp $25 billion or so (modestly above what Facebook paid, if less than the value of FB stock granted), and Messenger $10 billion, the businesses as a group account for ~20% of Facebook stock’s value. And they provide some protection for the slowing user growth that the namesake Facebook platform is likely to see going forward.
Alone, these businesses probably don’t provide a bull case for FB stock. But in conjunction with a still-reasonable valuation, they have the potential to drive upside in FB. And that’s something investors need to keep in mind.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
