9 Reasons Facebook Could Be the World's Most Perfect Stock
The average investor has more than 5,000 publicly traded stocks on reputable U.S. exchanges to choose from. With that much hay in the barn, finding a needle can be quite difficult.
But if you're looking for the world's most perfect stock, your search might end witharguably the dominant social media platform on the planet: Facebook (NASDAQ: FB). Since it went public in May 2012, shares of Facebook have risen by a brisk 283% -- and it may just be getting started.
Here are nine reasons Facebook might just be the world's most perfect stock.
Image source: Facebook.
1. Massive membership growth
The first thing practically any prospective investor will note when comparing Facebook to other social media networks is the company's sheer size in terms of membership compared to everyone else. Facebook ended 2016 with 1.86 billion monthly active users (MAUs), which was a 17% year-over-year increase. Perhaps even more amazing, 1.74 million of those MAUs were mobile users. For added context, Facebook had just 1.39 billion MAUs two years ago.
Comparatively, Twitter (NYSE: TWTR), which has long been viewed as one of Facebook's biggest competitors, has seen its membership growth flatten in recent years. Twitter reported in its first-quarter results this past week that MAUs had increased 6% year over year to 328 million. Still, that gives Facebook nearly six times as many MAUs as Twitter, and Facebook's membership is still growing faster even though the law of large numbers would usually suggest these growth numbers should be reversed.
2. Incredible ad-pricing power
Having 1.86 billion monthly active users and 1.23 billion daily active users (DAUs) means one thing: a lot of eyeballs that advertisers are literally jumping over each other to reach.
The interesting thing noted last year was that as Facebook's ad pricing was on the rise, Alphabet, the parent company of Google, was seeing click ad pricing on the decline. Facebook's mammoth membership has allowed the company to pass along reasonable ad price increases, as well as to dramatically boost impressions in order to really crank up its top-line growth. The more members it adds, the more impressions it'll be able to offer advertisers, especially with the company tinkering with new and innovative ways to get ads in front of the consumer (e.g., mid-roll video ads).
Image source: Facebook.
3. Untapped assets
As hard as this might be to believe, Facebook has a bounty of assets that it's hardly begun to monetize. WhatsApp has a purported 1.2 billion members as of April 2017 according to Statista, making it the second-most popular social media network behind Facebook. And get this: Facebook Messenger has approximately 1 billion members, tying it for third. Instagram, which is also owned by Facebook, has approximately 600 million members, good enough to make it the seventh-most popular social media network by subscribers.
Very few of these assets are being monetized in any meaningful way, with Instagram getting ads only within the past couple of years. There's still a ridiculous amount of advertising growth opportunity with WhatsApp, Messenger, and even Instagram and Facebook still to come.
4. Inorganic growth
Although Facebook has demonstrated that it can grow its business organically, it isn't shy about buying other companies in order to complement its own growth strategy.
For instance, Facebook ponied up $19 billion for WhatsApp back in 2014, which at the time seemed like an extraordinary amount of money for a social media network with around 450 million users. That deal isn't looking so insane now with around 1.2 billion active users on WhatsApp, the most popular messaging app for smartphones. With Facebook having a veritable stranglehold on the most popular smartphone messaging apps (along with Messenger), the company holds the key to what should be an explosive mobile ad market over the next decade.
Image source: Getty Images.
5. External revenue opportunities
It's no magic secret that Facebook relies very heavily on advertising to drive its top- and bottom-line results -- 98% of revenue came from ads in Q4 2016. This was a dangerous formula back in the dot-com bubble days, but it's probably not an issue for a company the size of Facebook today.
Nonetheless, Facebook is always looking for new and innovative means to generate new channels of revenue. For instance, it generates payment revenue when people buy virtual goods from the games they play on Facebook from their desktop computers. Even though desktop usage is declining (as is Facebook's payment revenue), this revenue is icing on the cake for the company.
6. International expansion
Investors should also understand that there's a seemingly multidecade opportunity for Facebook to expand into and grow revenue into currently emerging and underdeveloped markets.
As of the fourth quarter, the U.S., Canada, and Europe combined to represent 580 million of its 1.86 billion MAUs. But, the rest-of-world (ROW) MAUs totaled an even larger 606 million in Q4. However, the U.S., Canada, and Europe combined to generate more than $6.6 billion in revenue for Facebook in Q4 2016, compared to just $839 million for the ROW category. With only $1.39 in average revenue per user (ARPU), Facebook has a massive opportunity to target ROW markets in the years and decades to come. Comparatively, ARPU was more than $19 in the U.S. and Canada in Q4.
Image source: Getty Images.
7. Share buybacks
If you're buying into Facebook, you should probably be well aware that you're not going to be receiving a dividend anytime soon. Facebook has always maintained a reinvestment and growth-first policy, and as long as it's generating 17% MAU growth and seeing revenue grow between 30% and 60% annually, there's no reason for the company to consider returning money to shareholders in the form of a dividend.
However, the company isn't completely oblivious to shareholders' desires to share in the wealth. In November, Facebook's board of directors approved a common stock buyback of up to $6 billion. Though the filing stated that the timing of the buyback would depend on a number of factors, including Facebook's own share price and "alternative investment opportunities," it's good to see that investors could see some degree of shareholder yield in the years to come.
8. Management stability
Investing mogul Warren Buffett has often opined that great companies can do well even if they're run by less-than-talented management teams. While I tend to agree, it's always a bonus when a strong and stable management team is running the show -- and that's what investors will get with Facebook.
Zuckerberg helped found Facebook and he remains the critical figure behind its every move as CEO. As long as he is at the helm, Facebook should remain on track. We've also seen a number of Facebook's current executives, including COO Cheryl Sandberg and CFO David Wehner, cross the half-decade mark in terms of tenure with the company. This is a highly focused company, and its management team plays a key role in its success.
Image source: Getty Images.
9. Valuation
Last but certainly not least, Facebook is still attractively valued even after its shares have practically quadrupled since it went public.
Despite a trailing-12-month P/E of 42, which might seem a bit high to value-oriented investors, the company's PEG ratio is a mere 1.1. The price-earnings-to-growth (PEG) ratio factors in the future growth prospects of a company, and Facebook's growth prospects are unparalleled for a company of its size. Generally speaking, a PEG of around 1 is considered pretty inexpensive.
If Facebook continues to successfully navigate the social media waters and grow its membership, then it may very well be the world's most perfect stock.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Twitter. The Motley Fool has a disclosure policy.