Facebook Inc: This Is Why the Doubters Will Be Wrong on Facebook Stock

Facebook IncDon’t Bet Against Facebook Inc?

When a company becomes the industry giant and commands a $300-billion market cap, you’d expect its growth to slow down. But that’s not the case for Facebook Inc (NASDAQ:FB). Even with its enormous presence in the social media industry, the company—along with Facebook stock—is still growing like a startup.

The best part: Facebook’s economic moat is so wide that future success is almost guaranteed.

Let me explain…

Right now, Facebook’s largest source of revenue is advertising. And from my perspective, growth in Facebook’s advertising business appears to be just getting started.

The catalyst is the company’s native advertising strategy.

To put it simply, native advertising makes the ad look just like other content. In the case of Facebook, as users scroll down through their newsfeeds, they would see promoted content that looks just like another status update from their friends.

What’s more is that Facebook also started supporting native video ads. The video ad automatically starts playing once the user scrolls to it on the page (sound is added if they click on the video itself). It works amazingly well. I often find myself watching quite a few videos in my newsfeed before realizing they are promoted content.

Of course, video ads are nothing new. YouTube has incorporated video advertising on its platform for years.

In fact, you might think that YouTube would use this strategy just as well as Facebook, since YouTube is essentially a video streaming platform. However, whenever you are watching an ad on YouTube, are you not always looking for that “skip” button so you can just get to the video you wanted to watch? Maybe you have already installed “AdBlock” to avoid those YouTube ads before the actual video. Either way, users tend to find video advertising on YouTube disruptive; I’m yet to find someone so eager to block such promoted video content from Facebook, though.

You might also say that Twitter Inc (NYSE:TWTR) also has the native video ad strategy figured out. Sure, the platform supports native video ads, but note that Twitter’s ranking in “social networking” apps was so far behind that it had to move the app to the “news” category to improve visibility. A rival to Facebook? Not anymore.

So, Facebook has adopted a nice strategy in its advertising. What does it mean for Facebook stock? Well, it could improve both its top and bottom lines.

Facebook rolled out autoplay video ads last year and by looking at the company’s financials, the strategy certainly worked.

In the first quarter of 2016, Facebook’s advertising revenue totaled $5.2 billion, a whopping 57% increase year-over-year. Excluding the impact from exchange rate fluctuations, ad revenue would have surged 63%. (Source: “Facebook Reports First Quarter 2016 Results and Announces Proposal for New Class of Stock,” Facebook Inc, April 27, 2016.)

Of course, Facebook also had solid user growth in the period, so part of that surge in ad revenue could have come from its growing userbase. However, if you take a look at per-user numbers, you’d see that Facebook’s ad engagement did have some serious improvement.

In the quarter, Facebook’s average advertising revenue per user was $3.21, up 37% from the $2.34 in the year-ago period. (Source: “Earnings Slides,” Facebook Inc, April 27, 2016.)

And let’s not forget just how big Facebook’s userbase really is. Last time it counted, the company had 1.65 billion monthly active users (MAUs). Not many social media companies—or even just media companies—have such a large userbase to support their advertising platform.

This also means Facebook’s profits are guarded by the network effect. When everyone you know is on Facebook, you might want to join it too. The fact that Facebook is the largest social network platform on Earth means challengers will have a hard time taking users or profits away from Facebook.

The Bottom Line on Facebook Stock

Recently, Facebook stock has attracted the attention of institutional investors. On Monday, CNBC reported that Facebook is now the 14th most widely held stock among institutional equity investors. More funds today own FB stock than they do Home Depot Inc (NYSE:HD) stock, PepsiCo, Inc. (NYSE:PEP) stock, and Exxon Mobil Corporation (NYSE:XOM) stock. (Source: “Facebook Now Among the Top 15 Most Widely Held Stocks,” CNBC, June 6, 2016.)

If the smart money is giving Facebook stock a thumbs up, maybe you should, too.