Facebook Inc (NASDAQ:FB) stock is up about 36% over the past year. If you’re kicking yourself for missing out on the run up, don’t fuss. FB stock has several catalysts that can send shares even higher. At least that’s the word coming from one analyst.
Axiom Investment Management analyst Victor Anthony believes that FB stock deserves to trade at a premium because the social media giant is becoming “the world’s largest communications and entertainment platform.” (Source: “Facebook Is More Than Just A Social Network; Axiom Says Shares Are Worth $150,” Benzinga, April 4, 2016.)
On April 4, Anthony maintained a “Buy” rating on FB stock, while raising his price target from $145.00 to $150.00. At FB stock’s current price of $112.22 per share, that implies a 34% upside in the stock.
So what does Anthony see that will drive up FB stock?
The analyst believes there are several catalysts that will fuel Facebook’s growth over the next five years.
“Facebook’s five-year monetization path looks clearly defined to us, with Core Facebook, including video ads, Instagram, FAN (Facebook Audience Network), and Oculus, driving 2016 results, Messenger adding to 2017 results, WhatsApp driving 2018 results, Graph Search monetization getting added in 2019, and the China optionality in 2020,” Anthony wrote. (Source: Ibid.)
Let’s take a brief look at some of those catalysts.
Anthony believes video ads are likely to be the largest growth driver this year, with “Instagram” expected to add more than six points of incremental growth in 2016. (Source: Ibid.)
Video is increasingly becoming a focal point for Facebook. The company still isn’t breaking out its video ad revenue, but the social media giant is starting to hint at how big the segment is becoming.
Just how big?
In Facebook’s latest conference call, CEO Mark Zuckerberg said that users watch 100 million hours of video per day on Facebook and that 500 million people watch Facebook video every day. (Source: “Facebook Says Video Is Huge — 100-Million-Hours-Per-Day Huge,” Re/code, January 27, 2016.)
It looks like Zuckerberg also has YouTube in his crosshairs: “We’re also exploring ways to give people a dedicated place on Facebook for when they just want to watch videos,” Zuckerberg said. (Source: Ibid.)
Zuckerberg is also trying to take advantage of the explosive growth in online video ad spending. According to research firm Standard Media Index, ad sales for online video sites were up 63% last July over the previous year. Video ad sales on social media sites grew even more, up 93%. (Source: “Online Video Wins Big in Ads Sales, Siphoning From Broadcast TV,” OnlineVideo.net, August 20, 2015.) And according to research firm Magna Global, online video advertising is projected to hit $20.72 billion this year. (Source: “Online video advertising spending worldwide from 2014 to 2016,” Statista, last accessed April 6, 2016.)
Facebook earns the majority of its revenue from advertising, so it makes sense that the company is pushing into video. Video ads are usually more expensive, which means more revenue for Facebook.
Facebook’s “Oculus Rift” virtual reality (VR) headset shipped its first units last week and reviews have been mostly positive. Reviewers have noted that the headset is incredibly immersive and comfortable to wear, and that the device already sports an impressive catalog of games and apps.
All that praise bodes well for Facebook, which expects to ship approximately 600,000 Oculus Rift units by the end of 2016, generating revenue of approximately $400 million, according to Youssef Squali, a Cantor Fitzgerald analyst. (Source: “Facebook Will Turn Oculus Rift’s Revenue Potential Into Reality, Analysts Say,” TheStreet.com, March 31, 2016.) Sure, that doesn’t sound like a lot right now, but as user adoption accelerates over the next few years, the Rift will be huge.
How huge will the Rift be for Facebook? Squali forecasts revenue for the VR headset will quadruple next year to $1.6 billion. He also believes that by 2020, Facebook will sell approximately 11 million units, hitting nearly $7.0 billion in revenue. (Source: “‘Facebook Could Make $7B in Virtual Reality Revenue in 2020,’ Says Cantor,” Barron’s, March 31, 2016.)
If Squali’s forecast is correct, by 2020, Facebook’s revenue from the Oculus Rift alone will account for about 10% of the company’s total revenue.
At the end of 2015, Facebook’s “Messenger” had 800 million users, falling second in most popular apps, just behind “WhatsApp,” also owned by Facebook. (Source: “Most popular global mobile messenger apps as of January 2016, based on number of monthly active users,” Statista, last accessed April 6, 2016.) That presents an incredible opportunity for the social media giant to generate revenue beyond its Facebook newsfeed.
Significant results probably won’t be seen until at least next year, but Facebook is starting to plant some seeds.
Last December, Facebook announced that Messenger users are now able to hail an Uber car directly within Messenger. Even users who don’t have an Uber account can sign up without leaving the Messenger app.
Facebook also has plans to turn Messenger into a mobile payments platform. “The Information” uncovered some source code that reveals some of the commands found in the latest version of the Messenger app. These commands include “pay in person,” “pay directly in Messenger when you pick up the item,” and “no cash needed.” (Source: “Facebook Messenger is reportedly taking on Apple Pay and Samsung Pay,” VentureBeat, April 1, 2016.) It is expected that the new mobile payments feature would allow Messenger users to pay for an item in retail stores using the Messenger app. Facebook would authorize each credit card transaction.
With the mobile payments market exploding, it makes perfect sense that Facebook, with its massive userbase, would want to enter this space. In fact, according to research firm Forrester, mobile payments are expected to reach $142 billion in volume by 2019, representing a compound annual growth rate of 184% from 2014—no wonder Facebook wants in. (Source: Ibid.)
The Bottom Line on Facebook Stock
Despite significant growth over the last few years, Facebook still has lots of room to grow. With video ads and Oculus Rift headset sales about to take off, along with the expected monetization of Messenger, things should look good for FB stock.