Facebook Inc. stock has been on a run in 2017. If you thought FB stock was hitting a peak anytime soon, think again.
Shares of Menlo Park, California-based Facebook (NASDAQ:FB) have been on a roll in 2017. FB stock price is up 16% in the year-to-date, which is more than what the stock gained in the whole of last year, which saw FB investors spooked by management's commentary with respect to higher capital expenditures and slower ad growth. However, the increased expenditures with a focus on the 'video' format can only mean one thing: Facebook stock price is headed higher. Here's why.
Facebook's Multiple Growth Drivers.
Facebook has a number of growth drivers in the host of social media and messaging apps that it owns. The growing engagement on Instagram and the revenue opportunity it presents is just the first of many such opportunities Facebook has looked to tap. The fact that Facebook is yet to tap Whatsapp, with 1.2B monthly active users (MAU), and messenger, with 1B MAUs, there is no dearth of future growth drivers for the Menlo Park-based social media giant.
However, the performance of Facebook stock had been muted in 2016, rising by 9.9% through the year. comparatively, the stock was up 30% in 2015 and nearly 45% in 2014, which highlights the fact that investors were cautious in bidding the FB stock higher in 2016. Digging a little deeper into the chart shows that the stock price peaked at $130 levels ahead of its Q3 earnings call and sold off following the call to close the year at $115. What exactly spooked investors? Investors were spooked by comments from Facebook CFO, which hinted at a potential slowdown in ad revenue as ad load growth on the platform reportedly hit a peak.
However, the rise of Instagram is clearly supporting, helping Facebook overcome the slowdown, if any, on the core Facebook platform. This was also reflected in the latest quarter, which saw Facebook blow past expectations on possibly every metric. However, apart from Instagram, the management's commentary of "video first" could be another trend which could move the ad revenue needle for Facebook Inc.
Video Is The Next Big Mega Trend For Facebook
Quoting Mark Zuckerberg, CEO of Facebook, from the latest Q4 2016 conference call, "I've said before that I see video as a mega trend on the same order as mobile. That's why we're going to keep putting video first across our family of apps and making it easier for people to capture and share video in new ways."
Based on the CEO's comments, it is clear that Facebook is looking to video to drive the next wave of growth on the core Facebook platform. But what could it mean for Facebook's fundamentals? Let's look at how mobile has scaled for the company over the last 4 years.
Mobile has grown from an 11% share of advertising revenue in FY 2012 to account for nearly 84% of Facebook's ad revenue in 2016. In dollar terms, that's up from $471M in annual mobile ad revenue to nearly $22.48B in just a little over 4 years, a CAGR of 162% over the last 4 years. The overall revenue has grown at a more modest 53% YoY in the same time frame. Based on this, it's safe to conclude that 'mobile revenue' has been the major driver of Facebook's growth over the last 4 years. A similar mega trend in video could add significant ad dollars to Facebook's topline while also driving their bottom line over the coming years. As per eMarketer, video ads will be the fastest growing ad format within the rapidly growing mobile ad space.
Having established a firm footing in the mobile ad space, it is time for Facebook to leverage their mobile expertise to add more video ad dollars to its kitty. Hence, investors should be encouraged by Facebook's increased video spending as this could make video ad revenue the next major growth driver for the company.
Putting It All Together.
Facebook stock price has been on a run this year, already up 16% year-to-date. With the increased spending and focus on 'video first' Facebook is working itself into a position of strength to leverage the growth in the mobile video ad space, which is set to become one of the fastest-growing ad formats over the coming years. While this will drive longer-term ad revenue growth on the core Facebook platform, Instagram should offset any short-term concerns regarding ad load growth. Hence, long-term investors should buy Facebook stock, and buy more of it on every dip. We believe the Facebook growth story is still intact. Facebook stock also features among our top stock picks, which have beaten the market by over 130% since 2010.