The rally in Facebook Inc (NASDAQ:FB) stock is cooling off.
After rallying by around 50% this year, shares of social media giant, Facebook Inc (NASDAQ:FB) have hit a speed bump. Facebook shares have remained almost flat since its second quarter earnings and are down over 3% in the last one month. The rally in FB stock has cooled off as investors shift their focus to the management's warning about revenue growth deceleration and rising CapEx. The overall market sentiment has also not been conducive. The geopolitical turmoil relating to North Korea, and political uncertainty in Washington has weighed on the market. Given all this, the recent eMarketer report stating that users are leaving the Facebook platform has not exactly helped investor confidence.
A recent report by eMarketer states that teenagers are leaving the Facebook platform for Snapchat and Instagram. The report says that "the social network’s monthly user base among the marketer-coveted 12 to 17 age group will fall 3.4% vs. 2016 to 14.5 million people—the second consecutive year of expected usage declines by this group and one that will have accelerated from the 1.2% slip seen in 2016." Teens are coveted by marketers because their brand preferences are still gelling, they have money to spend, and they also exert a strong influence on their elder's spending.
But while teenagers are overlooking Facebook, some of them are migrating to Instagram, which is a Facebook owned property. Also, Facebook's overall users will continue to grow. So the news is not so bad. However, the management's warning regarding ad load saturation, rising CapEx this year combined with the story of teenagers leaving the Facebook platform will likely provide some headwind for the Facebook stock. Add to that, the 20-day moving average is proving to be a strong resistance for FB stock. Facebook stock has been unable to break out above the 20-day moving average line despite several attempts since mid-August. The stock is likely to face resistance for some time to come.
Videos and Instagram will drive growth for Facebook.
While Facebook stock is facing headwinds in the short term, the company is eyeing different avenues of growth. Instagram will continue to drive growth in the near term. Instagram Stories has become a huge success, surpassing the overall user base of Snap Inc (NYSE:SNAP) owned Snapchat in just eight months. The Stories module has opened up new inventory for ads. Facebook is also launching a similar feature on Facebook.com called Facebook stories. Facebook is also working on monetizing WhatsApp and Messenger, both of which have a huge user base.
For the medium term, Facebook is shifting its focus towards video content. The social media giant recently launched "Watch", a new tab on its website for viewing videos. "Watch" will contain a wide range of programs, from live event coverage (including Major League Baseball games and college football) to reality TV to scripted programs. "Watch" will appear as a new tab and will encourage users to subscribe to their favorite shows, see what their friends are watching, and find new shows that might match their interests. The management has said that video will be the key part of Facebook Inc's mobile strategy in the medium term. This could be a big source of revenue for Facebook. However, it will require huge investments which could put pressure on the stock in the near term.
Facebook Inc is diversifying into hardware.
Facebook is also looking to diversify into hardware. Facebook Inc is planning to make a home-based video chat device. The device will have a laptop-sized touchscreen with built-in smart camera technology. The aim of the device would be to let people at a distance feel as if they are closer. This device could be officially announced as soon as next spring’s F8 developer conference. The video chat device is likely to feature a wide-angle camera lens, microphones and speakers that are all powered by artificial intelligence to boost performance.
To complement the video device, Facebook Inc. is also planning to make a smart speaker. Smart speakers are becoming the latest trend in the tech space. According to eMarketer, 35.6 million Americans will use a voice-activated assistant device at least once a month this year—that’s a jump of 128.9% over 2016. Amazon, with its Echo line of smart speakers, dominates this space. Google, Apple, Samsung, and Alibaba are other tech giants which are investing in this space. the video chat device and smart speakers will be the first hardware developed by Facebook in house. Facebook already sells Oculus VR gears, however, it was not developed by Facebook. Hardware could be another source of revenue for the social media giant.
Facebook stock remains a good buy in the long term.
The rally in FB stock has come to a halt for now due to several headwinds the company is facing. However, the stock remains a good long term buy. It has several growth opportunities, from Instagram, WhatsApp, Messenger to hardware. In the recent quarter, the company had delivered strong beat and provided a better than expected guidance. Analysts continue to remain bullish on the stock. Recently MKM Partners raises its 12-month price target of FB stock by $20 to $200. Facebook stock is part of our top stocks to buy from tech sector which have outperformed Nasdaq Composite by over 135%.