Facebook Inc's Rising Competition With YouTube Could Be A Drag On FB Stock

With Facebook Inc and YouTube increasingly fighting for the video Ad dollars, will Facebook's aggressive video push be a drag on FB Stock?

Facebook Inc's Rising Competition With YouTube Could Be A Drag On FB Stock

Menlo Park, California-based Facebook Inc (NASDAQ:FB) reported stellar last quarter earnings and is still one of the best growth stories out on there in the market. To continue its growth story, the social networking giant recently made its biggest move to make itself a one-stop destination for video content by announcing a standalone TV App for videos and other video features on Facebook. Mark Zuckerberg is a big fan of videos and described 'video' as a "mega-trend". In one of our previous posts, we had already covered how Facebook is posing a threat to Alphabet Inc's (NASDAQ:GOOGL) YouTube. However, in a recent coverage on FB stock fellow Amigobulls contributor had discussed the headwinds faced by Facebook Inc and one of these headwinds coupled with the risks associated with the social media giant's video push could hurt FB stock. Let's take a closer look.

Effect On Profitability.

As covered in a previous Amigobulls post, Facebook in its annual report mentioned that it expects the company's capital expenditure to rise to $7-$7.5 billion in 2017 from $4.5 billion in 2016. It is an increase of 55%-66% from Facebook's 2016 capital expenditures. As quoted in our previous FB coverage, "Facebook expects its GAAP expenses to grow by 40%-50% in 2017, much higher than the 30% growth in expenses it registered in 2016". This is going to put a lot of pressure on the social networking leader's bottom line in 2017. The important point to note here is that a major chunk of this increased expenditure is supposed to be part of the company's aggressive investment in its latest video push. As a Motley Fool post points out as Facebook continues to bet big on videos, its infrastructure needs would go up and the company would be spending more on data centers, servers and network infrastructure. Also, Facebook has most of its data centers in the US alone with only two data centers abroad. One could expect Facebook to expand its infrastructure internationally, further increasing the capital expenses with the increased focus on videos.

What Is Going Right For Facebook?

A recent Business Insider post shares the stats for the most popular live-streaming platform in the US. According to the survey quoted in the report, Facebook Live was the most used live streaming platform in the US with 17% share beating YouTube by 1%. Facebook continues to work on getting more and more original video content on its platform, latest being the live streaming of matches from the Mexican Soccer league in a deal with Univision. Though the financial details of the deal are not disclosed, this is a good addition to Facebook's sports streaming portfolio. To quote Dan Reed, Facebook head of global sports partnership, on Facebook's growing popularity as a platform for soccer live streaming, "Soccer games have been hits with Facebook users. Last year, for instance, 3.7 million people tuned in for a Wayne Rooney-sponsored charity match between English Premier League teams Everton and Manchester United." This is a good start for Facebook but the rights to most major sports events and leagues are still with the traditional television companies. Also, the setback to YouTube's content plan as it parted ways with its biggest star PewDiePie bodes well for Facebook.

Risks and Competition For Facebook.

Alphabet's YouTube, to maintain its dominance in the digital video segment, recently announced that its latest updated mobile app will allow a live video streaming option to any YouTube creator with 10,000 or more subscribers. This move is directly aimed at Facebook Live. YouTube also stated this option would be opened for every other user later this year who sets up a channel for a share of the advertising revenue. A Forbes post states that "the completed views were higher on YouTube and the cost per quality watched minute on YouTube is cheaper" than on Facebook. The post sides with YouTube to maintain its dominance over Facebook here. The Forbes post suggests that the platform providing "cheaper quality viewing time for advertisers" would win in the long run. This doesn't sound good for either of them which would mean their own margins would go down drastically.

One important point to note here is that even the Mexican Soccer league streaming is still without advertising. As informed by the company in the past, Facebook had started testing mid-roll advertisements in videos on its platform but they are yet to go live on a full-fledged basis. This move could be a double-edged sword. A Motley Fool post puts it as "mid-roll ads start at some point in the middle of a video. That hits on the biggest reason people dislike digital advertisements -- they're disruptive. Facebook's mid-roll video ads have the potential to be the most annoying ad format it's introduced yet if it's not careful." Also, the post highlights that "only 36% of respondents said they dislike television commercials, while 57% said they dislike online video ads in a recent survey from HubSpot."

Mid-roll ads bring in a lot of risk of stopping the users returning to Facebook for video content if they prove to be bothersome for a majority of the users. At the same time, Facebook is running out of places to show ads but users are spending more time on Facebook consuming video content without ads. It is essential for the social media giant to monetize the video content in a direct manner. This would open an avenue for Facebook to incentivize original content creators to exclusively work with them on a revenue sharing basis. If Facebook fails to monetize the video content effectively, then this will also turn out to be like the 1 billion users strong messaging app Whatsapp which is very popular but associated costs keep piling up.

Facebook Stock Still A Buy.

Facebook's latest video push comes with its own risks which, as discussed above, could become a drag on FB stock. These are still early days to fully assess which way Facebook's aggressive video bet will go. Meanwhile, Facebook Inc continues to have various growth drivers with Instagram to name one. Facebook is also one of our top stock picks and it continues to be one of the best growth stories out there.

Looking for great tech stocks like Facebook? Check out Amigobulls' top stock picks, which have beaten the NASDAQ by over 122%.

Sreekanth Anasa Sreekanth Anasa   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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