Use Facebook Inc. Weakness As A Buying Opportunity

  • Facebook stock has been facing selling pressure in the month of April.
  • This can be attributed to various negative developments around the company.
  • But these are short-term headwinds and long-term investors should use the weakness as a buying opportunity.

Facebook (NASDAQ:FB) stock has been going through very choppy trading in April with the stock losing about 5% during the first week. This development is hardly surprising given that lately there seems to be a flurry of negative news on FB including :

  • Delayed shipping of Oculus Rift VR which Facebook says is due to an unexpected component shortage.
  • Warning by Deutsche Bank analyst Ross Sandlers who says mixed channel checks suggest that Facebook's Q1 revenue is likely to come in below high expectations.
  • A report about a negative trend that is emerging where Facebook users are sharing less on the platform.
  • And finally, a damning report that Facebook publishers had recorded traffic declines of as much as 20% from January through March.

These reports are certainly not good for Facebook Inc. In the case of Oculus Rift, Facebook investors are probably curious to see how much revenue potential the devices have. Oculus said the delay will only last about 10 days, so the first batch of shipments should be available in a few days' time. It's anyone's guess what components Oculus VR founder Palmer Luckey was talking about and whether this is a one-off situation or is something that is likely to recur in the future.

Cantor is one Wall Street analyst that is very bullish about the prospects of Oculus Rift and estimates the VR product could net $1B-2B in revenues for Facebook by 2017 and contribute 10% to Facebook's top line by 2020. The analyst says that VR could help FB beat long-term consensus analysts' estimates and reiterated its $140 PT for FB stock (26.5% upside).

I had earlier penned an article about Oculus Rift where I expressed my fears that it might end up sharing a similar fate as Google Glass. In the article, I talked about the cost hurdle since the device costs $200 more than Microsoft's (NASDAQ:MSFT) Xbox One and $250 more than Sony Corp's (NYSE:SNE) PlayStation 4, the two most popular gaming consoles. Moreover, all-in costs for Oculus when paired with high-end NVIDIA (NASDAQ:NVDA) GPUs can easily exceed $1,500 which I think is prohibitive for most casual gamers. The cost element might limit mainstream adoption. I worked out the revenue potential of Oculus Rift to be around just $720M by 2017, hardly a drop in the ocean for Facebook. I believe that at this point many investors and analysts have not priced in Oculus Rift into their FB price estimates using Cantor's highly optimistic projections. The way I view Oculus Rift with relation to Facebook stock is that if it turns out to be a dud, then Facebook stock will remain largely unaffected but if it works out according to Cantor's assumptions, then it could provide some serious lift to the shares. But ultimately Facebook's core performance is not in any way tied to Oculus Rift anymore than Microsoft's performance is tied to Xbox One.

The three other reports largely revolve around FB receiving lower traffic and user engagement dropping on the site which is a bad trend obviously. People sharing less on Facebook's platform threatens the company's chief moneymaker, News Feed. But the information says Facebook set up a team some months ago to come up with a solution to the problem. And now it has something to show for its efforts.

Facebook has just expanded Live Video viewing through added features on Facebook Live including expanded search and filters. Now Facebook Live will work pretty much like Alphabet Inc's (NASDAQ:GOOG) YouTube. Facebook has even paid some companies to supply original content to help Live get off to a flying start. Analysts estimate that YouTube brought in revenue of $6B in 2015. Facebook has about the same number of MAUs as Google with 500M people currently watching videos on Facebook every day. Even assuming Facebook Live monetizes at just half the rate of YouTube, the revenue potential for the video platform is very good. But even more important is that it will help make the Facebook platform even stickier and encourage people to share more on the platform. Monness Crespi’s James Cakmak even thinks Facebook Live can steal some TV ad dollars, which is something that cannot be said about YouTube due to a lack of premium content on the platform.

Investor Takeaway

Deutsche Bank has warned that Facebook might be unable to meet heightened investors expectations when it reports Q1 earnings in about 10 days' time. Facebook shares are likely to sell off and might lose another 5%-10%. Long-term investors should use the weakness to gain fresh entry points into Facebook stock or add to their existing positions.

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
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  • I do not have any business relationship with the companies mentioned in this post.
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