Facebook Stock Could Reach $200 But Amazon Like Growth Unlikely

  • Facebook will continue to hook up with other tech companies such as Uber to improve the experience of its users across its platforms. Fine in the near term but long term implications look bearish.
  • India will become a huge growth avenue for Facebook considering only 25% of Indians are currently online.
  • Ultimately Facebook is at the mercy of its advertisers meaning any such discrepancy could affect top line figures. Higher unemployment, interest rate hikes, countries going into recession are all risks going forward.

I wrote in a recent article here about how I thought Facebook was more undervalued that many analysts think and after researching the company and the sector even more, I still maintain this line of thinking. All the main metrics continue to increase for the social media company. Earnings, revenue, user numbers and engagement levels all point to sustained growth over the long term. Many bearish analysts point to the company’s astronomical price to earnings ratio which is well over 100 but as I pointed out in the article mentioned above, this metric at this stage of the company’s trajectory does not matter.

Facebook PE Ratio Chart
Source: Facebook P/E Ratio by Amigobulls

Every cent and more is being pumped back into the company. The $20 billion WhatsApp purchase and the $1 billion Instagram purchase illustrate the company’s intent to grow and not on producing robust net earnings every quarter. Is the tech sector entering a bubble? It very well may be but some companies should hold up well in the event this sector enters a bear market in the near term and Facebook should be one of those companies. Why? Well as TV viewership levels continue to drop off year on year, more advertisers are beginning to come online and social media platforms like Facebook seem the natural choice as advertisers can engage with prospects in a less pressurized environment. This goes back to the old adage that customers ultimately buy from people and not companies. Therefore well trained company employees who have excellent communication and interpersonal skills will thrive on platforms such as Facebook despite heightened competition in the future.

Facebook’s “Internet.org” initiative has one objective - to increase the number of people using the internet regularly. Users don't even need to sign up to Facebook initially. The company is more than confident that eventually they will. Why? Just look at programs such as “Facebook Connect” which enables users post comments on other websites. What does a non-Facebook user do when he or she wants to comment but Facebook comments is the only application available? Eventually the user will sign up which will enable Facebook to immediately begin tracking user movements and interests (which advertisers crave). Once the user signs up, its Facebook’s mission to become the user's hub (your home-page and base on the internet). To become the hub, optionality here is key and Facebook knows this which is why its messenger program is partnering with as many successful tech companies to ensure user experience is effortless. Just look at the social media’s recent partnership with Uber. To my knowledge, Facebook didn’t receive anything for inserting Uber links into its messenger program but Uber should see handsome traffic and revenue gains from this initiative. These moves are being implemented to improve the “stickiness” of Facebook and its other platforms which should increase engagement levels and consequently ad revenues going forward.

What is happening in India at the moment reinforces the point made above. Facebook is spending billions of dollars currently with respect to the roll-out of its "Internet.org" initiative through the use of drones, satellites and lasers. Many people are divided as to whether Mark Zuckerberg has only business interests at heart with this endeavor or is it his philanthropic and altruistic nature coming to the fore here. I believe both actually but Facebook has the most to gain in that its platform is only one of the few products on this free service. Zuckerberg is selling the roll-out as a "runway onto full internet access" but he knows full well that users will continue to use Facebook once they sign up for a paid service. Zuckerberg's interest in India is warranted. Just look at the growth profile. 25% of Indians are now online illustrating that the best is yet to come in this country. In fact, India's e-commerce industry is expected to reach growth rates of 35% which means the country will surpass $100 billion in sales (from $17 billion currently) in a matter of years. Foreign capital is flowing in the country's tech sector in billions as tech multi-nationals look for international growth avenues due to mature markets like the United States and western Europe beginning to level off. Competition is fierce in the tech sector at the moment and Facebook wants to do all it can to ensure it gets in at ground floor levels in this market and fend off other social media companies.

Therefore when you combine emerging market growth with partnerships with other tech companies, its evident that the near term should bring more growth for Facebook. Furthermore the shift to video ads across its platforms will only intensify in the quarters to come due to higher ad pricing. Nevertheless longer term projections are more bearish in my opinion for the following reason. Companies like "Airbnb" and "Uber" don't do anything with respect to net job creation when you look at the jobs both companies are taking from the taxi and hotel industries. Where is the job creation here? The more these types of companies flourish going forward (which some undoubtedly will), the more jobs will be lost on main street. With respect to Facebook, its all about the experience and engagement levels. The more Facebook can have you glued to its platforms (by also offering third party apps), the more successful it will become but at what price? Furthermore since Facebook relies on advertisers as its main source of revenue, something would have to give if jobs continue to be lost in the real economy going forward. Advertisers need broad markets and equality in terms of income levels to flourish and not narrow markets where the divergence in income levels are large (something that the tech boom is currently doing).

To sum up, I believe Facebook stock has plenty more upside in its share price considering the growth drivers it still has in its arsenal. However despite the company being able to transact business across multiple borders, it still is at the mercy of its advertisers. These advertisers over time will have to be affected by reducing numbers of jobs on main street which is something that tech companies are creating. Watch GDP numbers of countries where Facebook operates. If they slowly start to slide, that could be your cue to begin scaling back on your Facebook position. The US for example is critical to Facebook as it is where it derives the vast majority of its revenues. In 2009, global advertising fell off a cliff due the huge contraction in credit and if tech companies continue to globalize business affairs this trend could continue as advertisers begin to get fed up over fighting for scraps against fierce competition.

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