Facebook, Inc. (NASDAQ:FB) stock is still the best social media play. Backed by a vast reach and a highly engaged user base, FB stock is a good buy.
Mark Zuckerberg-led Facebook, Inc. (NASDAQ:FB) has easily been the best social media play, as far as investors are concerned. Facebook stock has returned over 350%, in absolute returns, ever since its IPO in 2012. In annualized terms, that's an average return of 35%+ over the 5-year time frame. In comparison, Twitter (NYSE:TWTR) stock has halved in value over its life as a public company while shares of Snap Inc (NYSE:SNAP), parent of Snapchat, are still trading 11% below the IPO price of $17 a share. While it's not exactly an apples to apples comparison, given the short trading history of Snap stock, Facebook stock has clearly been in a league of its own.
Given the solid returns Facebook stock has delivered, it's important to ask whether the stock is a good buy even today. However, before answering that, it is important to understand the core drivers of Facebook stock.
Advertising Segment Is The Core Driver Of Facebook Stock
Advertising revenue contributed over 98% of Facebook's total revenue in the latest quarter (Q2 2017). The contribution of the segment to Facebook's overall operations has grown steadily over the years, up from 82.4% in Q1 2012.
Facebook's advertising revenue has grown from $4.28 billion in 2012 to over $32 billion in the last 4 quarters. In light of the above revenue growth, it's important to understand the factors driving growth in Facebook's advertising business. As we have highlighted in earlier coverage, advertisers are flocking to the Facebook platform in large numbers (over 5M at last count), which is supporting ad prices on the platform. But, what exactly draws advertisers to Facebook in droves?
Advertisers will, by default, flock to places/platforms which attract the greatest number of eyeballs. With over 2 billion people flocking to the Facebook platform each month, it is no secret that Facebook has the numbers to draw the advertisers. In addition, Facebook users are known to be highly engaged (spend more time on the platform compared to other platforms). These two factors make Facebook a platform too big to be ignored by advertisers. ComScore, in its report titled '2017 US Cross Platform Future In Focus' analyzed social media platforms by reach and engagement. The chart below (from the ComScore report) summarizes the same.
Facebook's reach and the engagement levels of its users are most likely the biggest factors attracting a large number of advertisers. The next important question which investors need to answer is, Can Facebook continue to defend its key strengths of reach and penetration? Well, a recent chart from Statista offers some answers, and we are pretty sure every Facebook stock bull will be cheering this news.
Users Are Flocking To Facebook's family of Apps
According to data from research firm 'prioridata', the Android platform saw over 343 million app downloads in August 2017. And, how many of those app downloads were accounted for by Facebook's family of Apps? Well, WhatsApp led the list with nearly 88.5 million app downloads in August, followed by Messenger with over 76.6 million downloads. In fact, apps owned by Facebook occupied the top 5 spots on the list, with Messenger lite making it into the Top 10 as well. In total, Facebook owned apps saw over 274 million downloads in the last month, accounting for nearly 80% of the total app downloads.
Facebook, with its portfolio of Apps, continues to expand its reach rapidly, which will give Facebook access to an ever increasing mountain of customer data. In a world where 'data is money', Facebook can leverage this data to improve its ad targeting capabilities, which should positively impact advertiser ROIs on the platform.
To sum up, Facebook stock continues to remain the best social media play. Given the vast reach and high user engagement on the core Facebook platform and rising popularity of other Facebook owned apps, investors seeking exposure to the social media space should not look beyond Facebook stock. FB stock is one of our top stock picks from the technology sector, which have outperformed the NASDAQ by over 150%.
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