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3 Reasons Why the Rally Won’t Stop on Facebook Stock

Tom Taulli

Facebook (NASDAQ:FB) stock is back in gear again. Yes, it seems like old times! It’s as if the prior issues and controversies such as with privacy and security breaches have simply just gone away. The bottom line: For the year so far, the Facebook stock price has clocked a gain of 42%. To put this into perspective, Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) is up 12%, Apple (NASDAQ:AAPL) has gained 22% and Netflix (NASDAQ:NFLX) has returned 32%.

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Source: Shutterstock

OK then, what can investors now expect with Facebook stock? Has the move been overdone? Or is there still an opportunity here?

Well, we may not see the same kind of gains. After all, the markets are looking kind of dicey right now.

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But then again, I still think FB stock will still do relatively well. If anything, it may be a source of stability in a volatile environment.

So let’s take a look at three key factors for the bull case on Facebook stock:

FB Stock – Barriers To Entry

When Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) evaluates a stock, it looks for a moat. This is a strong barrier to entry against competitors.

Facebook actually has multiple moats. They include the main Facebook platform, Instagram, Messenger and WhatsApp. In all, these properties have a staggering 2.38 billion users and 2.1 billion use them on a daily basis.

The recent privacy issues have shown just how resilient these apps are. For the most part, users have not really cared much. They generally see that the value of Facebook’s apps as standout. Keep in mind that in the latest quarter the annual growth rate of the user base was 8%.

This is certainly impressive given the scale. What’s more, as seen with other social media operators like Snap (NYSE:SNAP) and Twitter (NYSE:TWTR), it’s no easy feat to grow a user base.

So Facebook’s moats position the company to keep getting an out-sized portion of the global ad opportunity.

FB Stock – Growth

Growth continues to be robust. In the latest quarter, FB reported that revenues jumped by 26% to $15.1 billion. There was also $6.4 billion in operating earnings (this excludes the $3 billion reserved for a potential payout for a fine to the Federal Trade Commission). And yes, a key driver has been Instagram. According to Kenshoo, the app saw 44% growth in spending in Q1.

But there is also a secular trend towards digital advertising. IDC forecasts that the market will go from $229 billion in 2017 to $360 billion by 2021, which is a compound annual growth rate of nearly 11%.

To keep up the growth rate, FB has several important levers. These include WhatsApp and Messenger, which are in the early stages of monetization. Facebook also is exploring entering new categories, such as payments (with a focus on a cryptocurrency) and ecommerce, such as with Instagram Checkout and Marketplace.

True, these are tough markets to crack. But the company has the big-time advantage of a massive user base and a treasure trove of data.

FB Stock – Valuation

Even with the run-up in FB, the valuation remains at a reasonable level. Note that the forward price-to-earnings ratio is at 20X, which represents a discount to the company’s growth ramp.

Wall Street is also getting more bullish. For example, the average price target is $221.50, which assumes about 18% upside from current levels.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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