Why Facebook Is Not in a Bubble: Growth Prospects for 2016 (and Beyond) 05 Apr 2016

Why Facebook Is Not in a Bubble: Growth Prospects for 2016 (and Beyond)

An accurate valuation of social media websites like Facebook is always a challenge — especially since the “best days” for social media companies are often in a future that is difficult to forecast. Revenues for Facebook depend on successful monetizing of its unique website and business model. From the time Facebook went public in May of 2012; critics have disputed what Facebook was worth because of doubts about revenues that could be created from the platform. As a sidebar note, the stock went public at $38 per share, traded just above $18 a few months later and has recently traded above $100.

This stock price performance has been fueled by the success of founder Mark Zuckerberg and his team in transforming Facebook into one of the most effective internet advertising platforms — in other words, monetizing the platform. This has occurred during disappointing advertising revenues on many other social media sites and internet publishers. However, Facebook still has critics pointing out that internet companies and social media businesses are in a “bubble” that is overvaluing such stocks.

Investors still recall a “Dotcom Bubble” from around 2000 and don’t want to repeat earlier investment disappointments with overvalued internet and tech companies. One valuable lesson to be learned from the earlier investing experiences is that companies should be looked at separately instead of assuming that all Dotcom companies are the same. For example, compared to other Dotcom social media sites, Facebook has a functioning business model and large user base.

“Find us on Facebook” has become a priceless slogan in modern business lexicon. In addition to existing advertising strategies, Facebook is now looking at new revenue channels and markets that will further enhance their bottom line in 2016 and beyond. In the following paragraphs, Research Optimus examines why Facebook has such good growth prospects in comparison to the competition.

Facebook — Not a Typical Company

The recent past provides an excellent illustration that Facebook is being perceived as “different” by stock investors. During a “mini crash” of social media stocks in May of 2015, LinkedIn, Yelp, Twitter and several others declined in price by as much as 20 percent — while Facebook’s price decline was limited to about 5 percent. While the S&P 500 index decreased in value by about 1 percent in 2015, Facebook’s stock appreciated by 35 percent.

Compared to other Dotcom companies, Facebook has a larger user base, generates revenues, has a functioning business model and demonstrates good growth prospects. For example, consensus stock analyst estimates for the next five years forecast annual growth of 29 percent for earnings per share. Active users on Facebook currently represent slightly more than 20 percent of the world’s population.

Because it is difficult to value tech stocks, the possibility of overvaluations is always real. However, the combination of business strategy, cash flow, balance sheet and growth rates provides multiple perspectives justifying Facebook’s current valuation and future prospects for additional price appreciation.

Successfully Monetizing an Active and Large Community of Users

While most social media websites talk about monetizing their websites in the future, Facebook has already done it with a powerful formula — a huge community of active online users, ongoing growth in the user population and impressive year-to-year growth in advertising revenues. Rather than a “pie in the sky” approach to future business revenues, Facebook already demonstrates impressive balances in their daily checkbook and is working on new revenue sources as well.

The combination of gaining new members at a rapid clip and a high percentage of users that spend significant time on their website is currently setting Facebook apart from other social media sites. This has not gone unnoticed by advertisers — Facebook’s third quarter advertising revenues were $1.2 billion higher in 2015 when compared to 2014. Based on recent results, 78 percent of ad revenues are derived from mobile channels used to reach users on smartphones and tablets.

New Facebook units such as WhatsApp and Instagram are still in their infancy in terms of generating revenues. The future monetization potential for these and other future acquisitions is expected to make strong contributions to Facebook’s bottom line in 2016 and beyond.

New Technologies and New Markets

Facebook’s business strategies appear to reflect that they want to be less dependent on advertising revenues. For example, Facebook acquired Oculus VR for $2 billion in 2014. The company is now marketing Oculus Rift, a virtual-reality headset offering a virtual 3D reality. Analysts forecast that 3.6 million units will be sold in 2016 — producing $1.23 billion in revenue. There could also be an advertising component for this product as virtual reality offers a promising ad platform.

Entering new markets can present growth opportunities for companies of all sizes, and Facebook plans to expand to markets in Africa and Asia that have been relatively untouched by competing social media platforms. The combination of innovative new technologies and new markets provide both justifications for recent stock appreciation as well as future growth prospects. Is Facebook’s stock slightly overvalued at current prices? Perhaps, but the likelihood of being in a bubble appears to be a remote one — particularly in comparison to all other social media stocks. As noted above, Facebook is definitely not a typical company.

Conclusion: Facebook Is Different and Has Good Growth Prospects

In terms of its brief time as a publicly traded company, Facebook is effectively a four-year old toddler. But investors appear to increasingly realize that Facebook is indeed special and different — a business prodigy that is expected to flourish for many years to come.

What is Facebook worth? Many analysts feel that the current valuation of $300 billion is high. However, what is the combination of new technologies, new markets, active users and a large social media community worth in a tech-savvy world of discerning consumers?

Research Optimus can help investors gain additional financial insights about Facebook and other potential investment choices. We help our clients to analyze investment risks as well as potential returns.

– Research Optimus

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