Facebook Stock: When Will The Bubble Burst?

  • Facebook stock price continues to rise year-on-year.
  • The company's ability to stay ahead of competitors is a key reason for their growth.
  • The fact that Whatsapp and Instagram aren't yet fully monetized means there is still a lot of revenue on the table.
  • Arrogance could be their downfall.

Since Facebook (NASDAQ:FB) IPO in May of 2012, Facebook stock price has gone on an upward trajectory. This is especially impressive, considering that the social media industry is incredibly volatile, and stable growth is something other companies in this space struggle with. A case in point, Twitter (NYSE:TWTR) is currently trading below its IPO valuation.

However, whatever goes up must come down at some point. After reviewing what Facebook is getting right, I will delve into the threats to their dominance.

The secret to Facebook's exponential growth,  in terms of engaged users and Facebook stock value, lies in their approach of constantly improving in all aspects.

Innovation

One of the traits of a company that has its eyes set on long term growth is their ability to predict what customers need before their competitors.

They had the foresight to acquire Oculus VR for $2 billion, and will go head-to-head with Microsoft's Holo Lens. This is likely to allow Facebook to offer great user experiences when integrated with Facebook. Plus, due to the fact that the device has a wide field of view. Facebook would be able to allow advertisers to display more engaging ads, and charge them more for the privilege.

Advertising

In the past, Facebook had an issue with striking the equilibrium between ensuring that advertisers have a good return on investment, while ensuring that users don't get inundated with ads. Therefore, Facebook made a move to reduce organic reach and increase targeting options. As a result, mobile ad revenues increased and played a role in their revenue reaching $4.04 billion in Q2 2015.

Consequently, for Facebook, mobile ads have proved a vital revenue stream. In fact, over the previous 8 quarters, mobile ads has contributed to 90% of revenue growth.

This is due to the fact that as smartphones become more powerful, consumers are choosing to conduct more activities on mobile. To put it into perspective, 44% of Facebook users only login on mobile devices.

Interestingly, Facebook is yet to fully monetize Instagram and Whatsapp. Therefore, once they execute a way of doing so without hampering the user experience, revenue will increase.

Additionally, in a move that is taken from Twitter's playbook, Facebook is now offering "lead ads". This allows users to send their personal details- i.e. name and email address- to advertisers. Advertisers are able to pay on a per lead basis. As a result, Facebook is offering these ads at a higher cost than their other options. However, the results based nature of this kind of ad is attractive for advertisers.

The aforementioned is likely to allow Facebook to accrue additional revenue from advertising.

Strategy

Facebook has the clear strategy of replicating the rest of the internet under Facebook, and due to the fact that it has so many users, publishers have to set up a home there. At the moment, setting up a social media account is almost a pre-requisite for running a legitimate business. As a result, Facebook, has drastically reduced the organic reach for posts stemming from pages. On one hand, this has 'forced' people who want to grow an audience and reach them to increase their ad spend.

This strategy of squeezing out as much from advertisers as possible could be Facebook's downfall. At the end of the day, advertising is one of Facebook's key revenue streams. At the moment Facebook's approach is profitable because they are the market leader. However, this is a story we know all too well: A tech company thinks that they can never be beaten and stray away from their core principles and is quickly eliminated.

For instance, at the peak of Myspace's dominance, they seemed unbeatable.

Secondly, Facebook is making a lot of moves in quick succession. There is an argument for there needing to be a period of consolidation.

Conclusion

In conclusion, Facebook is looking unstoppable at the moment. However, they shouldn't lose sight of what they are best at, which is to find innovative new ways of connecting people. Moreover, Facebook has an enviable set of acquisitions, and if they are able to integrate them with their main products in a user-friendly manner, the sky is the limit in terms of how high their stock price could rise.

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  • I do not have any business relationship with the companies mentioned in this post.
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Comments on this article and FB stock

user profile picture
lucidgoldfish
bullish
Comparing facebook to myspace is akin to comparing jolt cola to coke. Myspace never had nearly as many users as facebook. Facebook is a company that will never go away, it's model might change over the years, but it is never going to go belly up in our lifetimes.
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user profile picture
abdulj
bullish
Thank you for your opinion.
Do share this awesome post