The Bullish Case for FB Stock
Do you want to know why the bears have been so wrong about Facebook Inc (NASDAQ:FB)? It’s because they thought FB stock was just a social media play. Oh, how wrong they were—Facebook is the world’s directory.
Its business model is stunningly similar to the one used by Alphabet Inc. Google built a userbase from its search engine and e-mail service, then used that audience to attract advertisers. Google offered companies access to a massive amount of people.
Facebook did the same thing. With roughly 1.5 billion users, it can offer advertisers a stunningly diverse set of consumers. And the company has a highly sophisticated algorithm to match each advertiser to the right audience, giving it yet another competitive edge.
This model has been really, really profitable.
Facebook made $5.6 billion in the last quarter of 2015 alone. That’s a 140.5% increase from the same quarter two years earlier, which just goes to show how fast they’re monetizing. And it’s not like the company is drowning its revenue in a sea of expenses. (Source: “Facebook Q4 2015 Results,” Facebook Inc Investor Presentation, January 27, 2016.)
Net income was $3.7 billion for full-year 2015, up from $2.9 billion a year before. (Source: Ibid.) Not too shabby, Mr. Zuckerberg. But there’s still one way that Facebook could see more profits.
The company has a disproportional dependence on North America. The U.S. and Canada are only 13.7% of Facebook’s subscriber base, yet they account for 50% of all advertising revenue. (Source: Ibid.)
That relationship won’t always be so skewed. There’s only a certain amount of junk we can buy before we wear ourselves out. It’s hard to predict exactly when it could happen, but advertising revenue growth must eventually flat-line in North America. At that point, gains in Europe and the Asia/Pacific markets could keep the company pushing forward.
Even without China, where Facebook is currently banned, the Asian market could still contribute significant gains. There are more than 540 million users in that part of the world. It’s only a matter of time until rising living standards make them a viable target for advertisers. And that’s where Facebook will earn the big bucks.
Here’s a simple analogy to make it clear. Imagine if one company owned most of the highways in the world. If they placed a toll on all those highways, you’d simply have to pay. There would be no other way of getting where you need to go.
Likewise, Facebook owns the avenue to consumers. If advertisers want to hawk their wares, then they better be willing to pay the toll. It hasn’t (so far) made sense to push into developing markets, but sooner or later, those countries are going to boost domestic consumption. They can’t run their economies on exports forever.
Luckily, we don’t have to wait long. According to Statista, online advertising spending in the Asia/Pacific region is really taking off, meaning FB stock could surge in 2016. (Source: “Online advertising spending in Asia Pacific from 2010 to 2016 (in billion U.S. dollars),” Statista, last accessed March 15, 2016.)