Facebook Stock Returning 349% in Three Years
Double-digit, or even triple-digit, gains can be achieved in the Internet sector. But even in an industry filled with explosive companies, Facebook Inc (NASDAQ:FB) stock is still quite special. Why? Just take a look at the steadiness in its climb.
For the most part, the rise in Facebook’s stock was not exponential. There wasn’t much in terms of explosive growth. Still, in the past three years, the stock returned a mind-boggling 349%.
Following a big move like that, you’d expect that the stock would be prone to some pullbacks. For instance, Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) were the biggest gainers among S&P 500 companies last year, and both of their stocks tanked at the beginning of 2016. Facebook stock, on the other hand, just kept going.
In fact, ever since the beginning of the upward trend in July 2013, FB stock has mostly stayed above its 200-day moving average—which could be a significant support level. The stock dipped below that level twice, but on both occasions, it was quick enough to get back to its upward trend.
Below is Facebook stock’s three-year chart. Tell me, when was the last time you saw such a steady uptrend?
Facebook Stock Chart
Chart courtesy of www.StockCharts.com
That’s why Facebook stock is a rare find in today’s stock market. For a stock to keep climbing even when its peers are deep in the red, the company needs to have something special.
For Facebook, that special thing is called monthly active users, or MAUs.
You see, Facebook makes most of its money from advertising. In the most recent quarter, advertising accounted for 96.6% of its total revenue. For an advertising platform, a large enough userbase is key to attracting marketers. (Source: “Facebook Reports First Quarter 2016 Results and Announces Proposal for New Class of Stock,” Facebook Inc, April 27, 2016.)
That’s where MAUs come into play. Every month, 1.65 billion users around the world get on Facebook. That’s about one-fifth of the entire population of Earth and nearly one-half of the world’s population with Internet access. (Source: “Internet Users,” Internet Live Stats, last accessed May 17, 2016.)
Facebook’s userbase absolutely dwarfs that of its competitors. What’s more impressive is that despite its size, the company’s growth does not show signs of a slowdown.
In the first quarter of 2016, Facebook’s MAUs increased 15% year-over-year. This compares to Twitter Inc (NYSE:TWTR), which grew its MAUs by just three percent year-over-year during this period. (Source: “Twitter Q1 2016 Shareholder Letter,” Twitter Inc, April 26, 2016.)
At the same time, Facebook also managed to make more money from each user. In the first quarter, the company’s average revenue per user (ARPU) came in at $3.32, representing a 32.8% improvement from the $2.50 it made per user in the same period last year.
However, as investors have learned the hard way, no matter how well your core business is doing, a stock cannot rely on one segment. For instance, Netflix’s subscriber base was already huge and it kept growing at a record pace. Yet Netflix’s stock still saw a double-digit drop after a decent earnings report.
Luckily, Facebook does have some exciting segments besides its core social media platform that could turn into major catalysts for the stock.
First up is virtual reality (VR). Facebook acquired startup Oculus VR in 2014 for $2.0 billion. Now, the acquisition is about to bear fruit.
The company unveiled its VR headset “Oculus Rift” in January. The device has a price tag of $599.00, and has already started shipping.
Facebook also owns two of the most popular messaging apps in the world—“WhatsApp” and “Messenger.” While these apps are yet to be substantial to Facebook’s financials, they could provide major monetization opportunities down the road.
The Bottom Line on FB Stock
The company’s solid performance has attracted the attention of famous hedge fund manager Steve A. Cohen. According to a filing to the Securities and Exchange Commission, Cohen’s hedge fund Point72 Asset Management LP increased its position in Facebook stock by 82% for 2,318,900 shares in the first quarter. At the time, the stake was worth approximately $264.6 million. (Source: “Form 13F Information Table,” U.S. Securities and Exchange Commission, May 16, 2016.)
At the end of the day, keep in mind that despite the surge over the past few years, Facebook stock is not really that expensive. Sure, it’s trading at 72X its earnings. But the company’s forward price-to-earnings ratio is only at 26X. Both multiples are much lower compared to those of many of Facebook’s peers in the Internet business.
Given its strong core business, exciting future projects, and a not-so-crazy valuation, Facebook stock’s upward trend might just continue.