Facebook Inc: Soaring Ad Revenue Could Send FB Stock Soaring
Earnings Provide Tailwind for FB Stock
Although Facebook Inc (NASDAQ:FB) is one of the most successful tech investments ever, there’s still plenty of upside left in FB stock. Anyone who doubts that should take a look at the company’s stellar earnings report from last week.
Facebook delivered a jaw-dropping amount of growth. Second-quarter revenue increased a whopping 59% over the same three months last year, moving from $3.83 billion to $6.24 billion. (Source: “Facebook Reports Second Quarter 2016 Results,” Facebook Inc, July 27, 2016.)
The company’s net income growth was even more impressive than its sales. Net earnings came in at $2.06 billion, 186% higher than the same period last year and way above analysts’ forecasts.
To put it into perspective, small-cap companies are considered phenomenal when they’re delivering triple-digits gains, but it’s unheard of for one of the biggest companies in the world to put up those numbers—particularly when it’s in the company’s core business.
This wasn’t like saying you should be bullish on FB stock because the company had triple-digit gains in some random side business. No, we’re talking about 186% growth in net income. It was all thanks to Facebook’s mobile advertising profits, which is, by any definition, the company’s core line of business.
Remember That FB Stock Runs on Ad Revenue
I’ve been bullish on FB stock for years because I knew this is what the company is capable of. It has one of the savviest CEOs in the world (despite his age) and it has made some of the smartest investments in the entire sector.
The truth is that Facebook owns social media. FB stock isn’t just a play on the older, less cool properties like Facebook. The company also owns “Instagram,” which appeals to a younger audience, and “Messenger” and “WhatsApp,” which will soon start generating advertising revenues in their own right.
Like I said, Facebook owns social media. It is the king of the digital highway. Whether they’re publishers or advertisers, all companies looking to market content are forced to pay the king. It’s a toll highway when targeting millennials, so advertising agencies and publishing companies have no choice but to pay for ads on Facebook’s properties.
There are more than one billion mobile daily active users on Facebook, so it’s not like the advertisers or publishers have much of a choice. There’s only one highway in town and Facebook owns it. It may be rough for marketers, but it’s great news if you hold FB stock.
The Next Chapter of FB Stock Growth
There’s one big question investors ask themselves when looking at Facebook’s enormous growth: can the company keep it up?
Sure, FB stock has appreciated 224.2% since its initial public offering (IPO) in 2012, but that’s no guarantee on Facebook’s future. Past performance isn’t an indication of future performance. That’s an essential truth of investing, so I’m not surprised folks are looking for something a little more concrete.
For my part, I think FB stock has way more room to the upside, in particular because the company is investing heavily in video content. You may have noticed those clips that start playing automatically as you scroll down your Facebook newsfeed. Well, there’s going to be plenty more where that came from.
“Our community and business had another good quarter,” said Mark Zuckerberg, Facebook founder and CEO. “We’re particularly pleased with our progress in video as we move towards a world where video is at the heart of all our services.”
The Bottom Line on FB Stock
Facebook’s video program has significantly increased its popularity amongst users. They are spending more time on the app and are watching a lot more videos. Facebook has yet to monetize this service, but it’s shaping up to challenge YouTube in a major way.
More to the point, this move could deliver enormous gains for owners of FB stock. I expect video to keep Facebook atop the advertising pyramid, which guarantees the social media king stellar earnings for the foreseeable future.