3 Reasons Facebook Stock Could Rise

By Markets Fool.com

Though not necessarily well-received by Wall Street, Facebook CEO Mark Zuckerberg and team announced yet another strong quarter. The tepid response by industry pundits, despite Facebook obliterating year-over-year earnings and revenues, is not without some merit. That said, there are several reasons 2015 could turn out to be another banner year for Facebook shareholders.

Continue Reading Below

Even as social media wannabes like Twitter are struggling to address critical measures like user engagement and increasing revenues without eroding their user experience, Facebook not only excelled in those key areas last quarter, but is positioning itself for future success. Sure, strong year-over-year revenue growth was great to see, but just as important are signs that Facebook will continue to deliver outstanding results.

A method to Facebook's madness

As we were forewarned by Facebook CFO Dave Wehner, expenses shot through the roof last quarter. Compared to Q4 of 2013, Facebook increased spending a whopping 87% last quarter. Naturally, the $2.72 billion in expenses negatively impact operating margins, and investors can expect that will be alluded to by Facebook naysayers for some time.

But when you dig a bit deeper, Facebook's increased spending isn't necessarily a bad thing. In fact, as Zuckerberg pointed out during its conference call, Facebook upped its headcount in 2014 by 45%, invested heavily in infrastructure, including a new data center, and is in the midst of assimilating significant new properties, including WhatsApp, Oculus, and Instagram. And Facebook's spending is providing returns.

Facebook Messenger passed the 500 million monthly average user (MAU) threshold last quarter, WhatsApp topped 700 million, and Instagram claims over 300 million MAUs. Now consider Facebook's 1.39 billion MAUs, and the foundation is there to drive growth long into the future. Additionally, as COO Sheryl Sandberg alluded to, Facebook is further developing its data analysis capabilities to give its marketing partners even better measurement tools. Which, in turn, will translate to even higher ad rates because Facebook will be able to provide advertisers with definitive return on investment results.

Continue Reading Below

Another perceived negative from Facebook's Q4 and 2014 annual earnings announcement was slowing user growth. In Q3, Facebook had 1.35 billion MAUs compared to its most recent quarter's 1.39 billion. However, unlike Twitter, Facebook is no longer in MAU hyper-growth mode. At Twitter's growth stage, with its relatively paltry 284 million MAUs -- only marginally higher than its previous quarter -- adding a few million MAUs per quarter is cause for concern. But let's face it: with nearly 1.4 billion active users, growing MAUs significantly is going to require implementing Zuckerberg's Internet.org initiative, and that's not going to happen overnight.

More important than sheer MAU volume is the fact that Facebook is continuing to improve user engagement. As Zuckerberg pointed out, on average users are spending 10% more time on Facebook than last year, and the all-important daily average user (DAU) count is growing. An impressive 864 million Facebook fans are on the site daily, and over 700 million DAUs are of the mobile variety. When it comes to Facebook's advertising partners, you can bet they'll take engaged users over sheer volume any day.

Finally, Facebook is ready to take the training wheels off video ads, and should benefit from the increase in revenues that will come along with them. Already, more than two billion videos are shared daily across Facebook and its properties, with over three billion views. Clearly, Facebook users like their videos, as do advertisers. According to one recent estimate from eMarketer, video ads will account for nearly $8 billion in revenues this year, and you can bet Facebook will garner more than its fair share now that video spots are going mainstream.

Spending now on key ad-related measurement tools, people, and infrastructure, continuing to improve the user experience, and going all in on video spots should help to drive continued, outstanding growth in 2015. And by implementing these strategic initiatives now, Facebook is laying the foundation for success well into the future.

The article 3 Reasons Facebook Stock Could Rise originally appeared on Fool.com.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.