- Facebook has 5 key factors making it a hot buy for 2016.
- Their commitment to user acquisition and engagement is fueling ad revenue.
- An interesting foray into mobile payments could be a game-changer for the stock.
Mark Zuckerberg's Facebook (NASDAQ:FB) is the world's largest social networking company. However, it is much, much more than that. The improvements they have made to their ad product, video syndication, and other aspects of their business shows that their sights are set beyond facebook.com. Plus, with their foray into mobile payments (more on that later), Facebook wants to increase its revenue, by taking big chunks from other industries.
The numbers don't lie; Facebook's impressive results in key areas shows us that their strategy is working. Below are 5 main reasons why social media investors might consider adding Facebook stock to their portfolio for 2016.
1) Facebook's impressive engagement rate
The mark of any social media website can be split into two main areas: firstly, the rate at which new members are acquired, and secondly, the average engagement rate. In these two areas, Facebook doesn't disappoint. With 1.5 billion active users, an average time of 20 minutes a day being spent on Facebook, and 91% of millenials (spend-happy market) signed up, they are the social media network to beat.
Interestingly, engagement is something Twitter has struggled with.
Due to the fact that Facebook has a good engagement rate- and continually works towards improving- it has become an attractive site for advertisers. As a result, Facebook's advertising revenues have increased Y-o-Y, thereby creating a funnel whereby as more people join Facebook, their revenue increases.
Additionally this social media giant continues to work towards attracting users in less represented areas such as Asia and Africa.
2) Financial performance
There will be no point to all of Facebook's conquests as a social media empire, if significant revenue isn't being added. Fortunately, this is a factor that has caused them to be highly favored in investment circles.
After their Q3 results, we found that YoY revenue growth stood at an impressive 40.5%, along a net profit margin of 20%. Additionally, their free cash flow margin comes in at a robust 31.4%.
Due to improvements in Facebook's ad product, and how content is syndicated, the revenue is likely to increase next year. Moreover, due to the fact that Facebook have a strong interest in mobile payments and have made a set of forward thinking acquisitions, revenue is set to increase in 2016.
When Facebook bought Whatsapp for $19 billion, there was a strong sense within some investment circles that it was a bad deal. Whichever way we look at it, this purchase allowed them to access an audience of a billion people who spend a lot of time using the mobile messaging app. Whatsapp use is growing at such a speed that arguably they bought their closest competitor before someone else did, i.e Google.
Whatsapp hasn't been monetized yet, but with more than a billion users, there is a potentially large sum of money on the table.
Secondly, Facebook invested in the future by purchasing the Occulus Rift. The potential for such a device go far beyond gaming. One can imagine it being used in the education, health, or sports industries. In fact, it is only limited by the imagination of developers.
Fortunately, I had the opportunity to spend some time with a development version of the Occulus Rift, and it was easily the best experience I have had with any device. Expect the Occulus Rift to add a lot of revenue to Facebook in a few years time.
4) Ad revenue
Facebook continues to innovate and improve its ad product in order to increase revenues. For instance, they recently allowed advertisers to increase the reach of ads by being able to post on Instagram. Moreover, new ad options have been released.
With ad revenues in Q3 up by $1.2 billion as compared to the same quarter last year, expect the new features to add significant revenue. Secondly, Facebook has decreased the organic reach of Facebook page posts over time. Interestingly, this is inversely proportional to their stock price. This is because as organic reach decreases, page owners are having to spend more money on ads in order to reach audiences.
Facebook has also spent time improving its mobile apps; and rightfully so. In fact, an astounding 78% of advertising revenue stems from mobile users.
At the moment, Facebook has close to 3 million active advertisers; and as they continue to increase their presence in Asia and Africa, expect that number to grow exponentially. Additionally, as smartphone use and high speed internet access becomes more widespread, Facebook will be able to sell more ad inventory.
5) Mobile payments
On the 30th of June 2015, Facebook launched mobile payments in the US through Facebook messenger. It is similar to Venmo in the sense that it aims to provide an easy way for users to send money to friends. It is worth considering that the mobile payments industry processes approximately $235.5 billion in transactions every year. An astounding 79% of that goes through Paypal Holdings (NASDAQ:PYPL).
The biggest win when Facebook rolls this out globally is the fact that it will have many payment details on file. Therefore, this will make it more convenient for users to pay for items without leaving Facebook. This could cause an interesting foray into ecommerce. Consequently, Facebook could see significant revenue addition.
In conclusion, Facebook continues to execute a range of innovative strategies in order to acquire new users, increase engagement, and add extra revenue. As the old saying goes: "The numbers don't lie". Facebook continues to grow from strength-to-strength in many areas. Momentum is firmly behind them.