Don't Underestimate Facebook Stock's Upside Potential

  • Instagram has grown rapidly since Facebook acquired it in 2012. Furthermore, it has huge monetization potential which remains to be exploited.
  • Increasing engagement of Asian/Pacific numbers will take place eventually which will boost advertising returns in the region.
  • The WhatsApp service will eventually provide companies the opportunity to interact with prospective customers.

Facebook (NASDAQ:FB) is now trading at well over $118 a share and despite the company's lofty valuation, it would take a brave investor to short the stock from these levels. Why? Well despite the stock trading at an earnings multiple of 72.7 and a sales multiple of 17.2, it still has many growth triggers ahead of it which could propel the stock 20% forward. The company's latest set of earnings confirmed this when revenue grew by 52% and daily user growth (I prefer monitoring daily over monthly as engagement levels are higher) climbed 4.8% to hit 1.09 billion (even faster than monthly growth rates).
FB stock chart

Source: Facebook Stock Price Chart by

The "rest of the world" region's ARPU (average revenue per user) was poor compared to other regions but I believe some analysts are reading too much into this metric at present. Why? Because this is where the company's core user growth is coming from at present and long term user growth is much more important to Facebook at this stage than quarterly revenue totals. It will over time raise the ARPU of these users meaningfully in quarters to come as engagement levels improve. Fundamentally Facebook has a lot going for it at this moment in time.

Management has to be credited for Instagram's huge progress recently as it has grown so much since it got acquired 4 years ago. To go from 0 to 200,000 advertisers in double quick time illustrates to me that this side of the business will drastically increase Facebook's mobile ad revenue over the next few years. The main reasons why I see Instagram being a huge hit in years to come is its demographics and engagement levels.

Presently the platform mainly comprises of affluent teenagers (which are an advertiser's dream) and the video and image nature of the platform enables advertisers to drive ads based on gender, age, country and preferences. This is why Instagram is expected to make up 14% of mobile ad revenues by 2017. Facebook can really charge a premium for this targeting ability which confirms to me that the perceived acquisition price and the huge investment that went into the service afterwards ( to improve speed and performance) will pay off in spades down the line.

Instagram ties in really well with Facebook's obsession with getting more video on its platforms. The online video market (ad spend - see chart) is projected to grow strongly this decade and the company's audience network (FAN) will ensure that advertisers will be able to even extend their reach beyond Facebook's platforms by also having their ads show up on third party sites. Here is where the bears are wrong about perceived "saturation" in Facebook's user numbers. It's not about user numbers but rather all about engagement. Video ads are the best when it comes to ad revenue which is why it came as no surprise to me that Facebook continues to keep its foot to the floor in this area.


Trends change quickly in social media and what is interesting of late is that WhatsApp has been surging in popularity over the last few months.  The shift happening at present is that messaging apps (which tailor to more individual communication) are surging in engagement levels and WhatsApp continues to be the number 1 app in this space.  Since the subscription fee didn't work out as a monetizing solution for WhatsApp, the company has decided to test tools that will enable companies to interact with users over the platform.

The scope here is huge as users will be able to get their queries answered on the spot from registered businesses on the platform. I see Facebook going local here which would be a powerful initiative. Imagine being able to look up a restaurant, hotel or even dance classes in your area and send an instant message to confirm availability, pricing plus get all your queries answered?. This would be far more efficient than a phone call. It is an initiative that companies would jump at because of the engagement potential. I see businesses getting charged for messages sent for a flat monthly fee. Watch this space.

To sum up, although Facebook is up over 13% year to date, I see this stock going higher. Video and engagement levels on Instagram are growing rapidly and WhatsApp should be bringing in sizable income by the end of next year. Facebook continues to push the boat on regarding its video audience network initiative which over time will increase ad relevance and earnings respectively. Facebook getting to $130 a share by the end of the year is not out of the question in my view.

Jack Foley Jack Foley   on Amigobulls :
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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
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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