Facebook (NASDAQ:FB) has become one of the world’s most-criticized companies and one of the most controversial stocks on Wall Street over the past year. Yet despite the negative headlines and commentary, FB stock has been extremely resilient.
Nomura Instinet analyst Mark Kelley recently upgraded Facebook stock to buy from neutral. Kelley’s bullish thesis for the shares centers on the fact that bearish concerns don’t seem to have much negative impact on the social network’s business. Facebook management is executing its growth plan flawlessly. For such an impressive growth company, FB stock’s modest earnings multiple creates an attractive risk-reward skew for investors.
Transition To Stories
From an operational standpoint, one of the most impressive facets of Facebook’s start to 2019 is its success with Instagram Stories. Social media competitors Twitter (NYSE:TWTR) and Snap (NASDAQ:SNAP) have both struggled adjusting their platforms to maximize advertising revenue. However, Kelley said early indications suggest Facebook’s move to transition its Instagram and WhatsApp platforms to a Stories-based model are going extremely well.
As of the fourth quarter of 2018, Instagram Stories had 500 million daily active users and WhatsApp Stories had more than 450 million. As of the end of 2018, more than 2 million advertisers use Instagram Stories ads. Facebook has not significantly monetized WhatsApp Stories just yet, leaving another massive growth opportunity.
Kelley estimates 2018 Instagram Stories ad revenue of roughly $746 million. Incredibly, he is projecting 2021 Instagram Stories revenue of $7.53 billion.
At first glance, that extreme growth rate may seem crazy optimistic, but a closer look shows it’s roughly in-line with the growth rates of early-stage mobile advertising revenue. In 2013, Facebook reported about $3.1 billion in mobile advertising revenue. By 2016, that mobile ad revenue had exploded to $22.4 billion.
The Stories ad format is still in the infancy stage, and the potential is huge.
User Trends Better Than Anticipated
As the user count for Facebook and its various platforms climbs further into the billions, bears argue that social media penetration and engagement can only go so deep. Fortunately for Facebook investors, the company keeps finding new ways to improve its metrics.
In the fourth quarter, Facebook’s ratio of daily active users-to-monthly active users increased slightly from 76% to 77%. In other words, engagement is improving. According to analysis by SimilarWeb, overall monthly visits to the primary Facebook platform were down 10% in January. In the same month, however, visits to Instagram were up 29%.
App downloads in February were positive across the board. WhatsApp downloads were up 26%, Messenger saw a 10% increase, Facebook app was up 8%, and Instagram downloads rose 1%.
While much smaller platforms are struggling to add users, Facebook is doing just fine. In the fourth quarter, total daily active users were up 8.6% year-over-year. In Asia, Facebook’s largest global user base grew by 14.3%.
Facebook Stock Is Cheap
The Facebook bear case is all about the story. Young people don’t use Facebook. Regulators are going to make life miserable. Costs will continue to rise. Yet quarter after quarter, Facebook continues to post impressive financial numbers.
fourth-quarter revenue was up 30%. Net income was up 62%. Profit margin was up 23%. Average revenue per user was up 19%. Looking ahead to 2019, Facebook guided for at least a 40% increase in costs. But so what? Kelley says he wouldn’t be surprised to see Facebook’s operating margins above 38% by the end of 2019.
Growth numbers like these are a rarity on Wall Street, yet Facebook’s valuation is extremely reasonable. Facebook stock trades at a forward PE ratio of below 20. That’s not the type of valuation investors typically see in such a high-growth stock. It appears as if a significant slowdown in Facebook’s growth is already priced into the stock. That slowdown may actually happen in the next couple of years. But if it’s already factored into the FB stock price, downside is extremely limited even in a worst-case scenario.
On the other hand, Facebook may continue to surprise the market with its execution and ability to pull more growth rabbits out of its hat. In that scenario, FB stock could easily maintain its status as a market leader. At this point, the risk-reward skew is very appealing.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.