10 Things to Know: Facebook
Facebook recently reported another good 3rd quarter, surpassing $10 billion in revenue in a quarter for the first time ever. The company is still growing its daily active users and monthly active users. On the company's earning call, Facebook execs gave investors an idea of where they believe their growth will come from and where they plan to take the company.
As Facebook continues to climb in price we continue to look back at major price milestones and wonder, "why didn't we buy this stock?" The company is approaching the $200 per share mark. We wondered does the company have enough going on to get the stock to and past $200 per share?
In our 10 things we look at the now, the headwinds, and the future of Facebook to see if it's worthy of an investment.
Here are 10 things to know about Facebook.
1. In recent 3rd quarter results Facebook reported revenue of $10.1 billion, surpassing Wall Street's expectations by $490 million. This represents a 47% increase over 3rd Quarter 2016 revenue.
2. If you aren't aware 95% of Facebook's revenue comes from advertising. Because of this it is important to the business of facebook to keep its user base growing and coming back to Facebook and staying engaged.
3. In 3rd quarter 2017 Facebook was able to grow its Daily Active Users and Monthly Active Users by 15% compared to 3rd quarter 2016. These numbers for DAUs and MAUs do not include Instagram, WhatsApp, or Oculus users.
4. In September WhatsApp suffered a complete blockage in China as the government stepped up security ahead of a Communist Party meeting in October. A WhatsApp ban in China did occur in July but the ban was lifted a few weeks later. Hopefully the recent blockage will be temporary. At the time of the recent ban WhatsApp was the only Facebook service allowed in China.
5. Russia! Facebook has admitted that Russia purchased advertisements on Facebook during the 2016 election in an effort to sway the election. This issue forced senior executives of Facebook, Google, and Twitter to Washington D.C. to answer questions about the interference from Russia. While it is a serious matter, we don't foresee serious consequences for Facebook. However the issue will cost Facebook money.
6. In Facebook's 3rd quarter earnings call the company noted that 2018 will be a significant investment year. Facebook expects expenses to grow by 45 - 60%, and it plans to make a "sizable security investments in people and technology to strengthen our systems and prevent abuse"- David M. Wehner, Facebook. Facebook also plans investments in video content, augmented and virtual reality, and artificial Intelligence technology. To give more context to the expense growth of 45 - 60%, Yahoo Finance estimates that Facebook's revenue in 2018 will grow by 30%.
7. On August 9th, 2017, Facebook launched Watch, a video platform within the Facebook website and app that is free for Facebook users. Facebook has stated it plans to spend $1 billion for the rights and production of original content. Watch out YouTube.
8. Facebook and the NFL have entered a multi-year global programming deal where Facebook will publish official highlights and recaps among other content. This is another serious step towards implementing video and growing video viewership. As ESPN struggles, Facebook offers NFL fans another option to get their highlights. Watch out Disney.
9. Facebook has implemented the ability to order food straight through its website. The feature incorporates several food ordering services including Delivery.com, EatStreet, and ChowNow. Just another feature to keep Facebook users engaged with the app and website.
10. Facebook reported that is seeing good progress with Workplace. Workplace helps companies connect their own teams internally. Think of Facebook, but just for your company. 30,000 companies are now using Workplace and it recently welcomed Walmart as a customer. This is another major step for Facebook as it moves from the average users to incorporating the platform into businesses.
Workplace by Facebook
When looking at Facebook for a possible investment, we love the DAU and MAU growth and the revenue growth. According to eMarketer.com digital spending will see double-digit growth each year of the forecast, soaring from $83 billion in 2017 to $129.23 billion in 2021. If this prediction holds true Facebook can be a major beneficiary. But in order to benefit Facebook will need to keep people coming back to the platform.
The company does face some headwinds in China with the country's ban of WhatsApp, and in the U.S. with the investigation into the Russian advertisement purchases on Facebook. China has banned WhatsApp in the past and has lifted the ban, and we expect that to happen again. We doubt that the review of Russian interference via Facebook to influence voters will result in any federal regulation that will effect Facebook.
The company stated in its 3rd quarter earnings call that they feel the upcoming trend is in video, and this is where they see growth coming from. The company is spending on original content and has signed a deal with the NFL to show highlights, so they are committed to video and the engagement it brings. However, spending money on original content is the easy part, finding content that people want to watch will be the challenge.
We've seen analysts price targets for Facebook ranging from $130 to $230. We feel Facebook is more likely to hit $230 before $130, but it won't be a straight shot from the current price. Our current buy zone for Facebook is between $167 and $180.
(chart by E-Trade)
Facebook is currently trading at the top of our buy zone, and since we hold no position right now its doubtful that we would purchase shares or call contracts at the current price. We would like to purchase Facebook closer to $167 than to $180.
From the our review of Facebook and the 10 Things we've isolated, we feel there are enough catalyst in place to get Facebook's stock to and above $200 per share.
We hope this adds value to your investing. If you want to read more about Facebook's 4th quarter results you can read more here.
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Thanks for reading.