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Are You Buying Facebook Stock for the Right Reasons?

Jamal Carnette, CFA, The Motley Fool

This has been a year Facebook (NASDAQ: FB) CEO Mark Zuckerberg would rather forget. After years of being hailed as a visionary CEO, Facebook and Zuckerberg's reputation have taken a hit in 2018 as concerns about data handling and privacy have dominated headlines.

Despite the cacophony of negative news and its biggest one-day loss, the stock continues to impress. Facebook shares have still posted a year-to-date gain as of this writing, and they've increased 350% since the company's 2012 IPO. Before you buy the stock, it's important you understand the key reasons to do so.

Woman investor looking pensively at computer screen.

Image Source: Getty Images.

Three reasons to buy Facebook

The Facebook "buy" thesis consists of three long-term drivers:

Increased revenue per MAU in the developed markets: Facebook's $119 billion sell-off was due to second-quarter earnings, specifically lower-than-expected monthly active user (MAU) figures from the developed markets of Europe and U.S./Canada. Sequentially, Europe reported a loss of 1 million MAUs, while the United States reported no gain. Year-over-year MAU growth was slightly better at 4.4% and 2.1%, respectively.

  Q2 2017 Q2 2018 Growth (YOY)
U.S./Canada revenue  $4,556 $6,251 37.2%
U.S./Canada MAU 236 million 241 million 2.1%
U.S./Canada: revenue/MAU $19.31 $25.94 34.4%
Europe revenue  $2,242 $3,302 47.3%
Europe MAU 360 million 376 million 4.4%
Europe: revenue/MAU $6.23 $8.78 41%

Data from Facebook; may differ slightly from reported numbers due to rounding. All dollar figures in millions. YOY = year over year.

However, Facebook reported revenue growth from the U.S./Canada and Europe of 37.2% and 47.3% during this time frame, as the company was able to substantially increase revenue per user. While user growth may be harder to come by, Facebook can continue to grow revenue by making more from each user in those markets.

Continued shift to digital advertising: Look for the trend above to continue. Analytics firm eMarketer expects mobile digital advertising spending to eclipse television advertising this year and continue to win share throughout 2022. At that time, the combination of desktop and mobile marketing will grow from 48.56% of total U.S. marketing spending to 62%. As the digital advertising market is a firm duopoly with Facebook and Alphabet, both are in a strong position for future growth, both in the United States and abroad.

The reason for the shift is best summarized by The Economist: In a heavily trafficked article last year, the financial journal argued "data is the new oil," as digital advertising has the potential for better data collection and more effective ads.

Growth from Instagram and WhatsApp: Although MAU growth has slowed considerably on Facebook's eponymous site, user growth has continued courtesy of Instagram and WhatsApp. In June, Instagram reported 1 billion MAUs, an increase of 25% from the 800 million reported in September of last year. While the company is tight-lipped on the revenue generated from Instagram, it's slated to become a bigger part of Facebook's top-line growth.

WhatsApp is a curious story. After paying $22 billion for the service in 2014, Zuckerberg pulled the plug on WhatsApp co-founder Jan Koum's subscription-based monetization model. Koum recently left the company after clashing with Zuckerberg's new monetization plans, which use an advertising model.

Investors, however, should note that WhatsApp's monetization is still in the infancy phase, while Instagram still has both user growth and revenue-per-capita expansion ahead of it. Needless to say, in the immediate time frame, Facebook's top line will continue to grow.

Final takeaway

Although the company missed analysts' expectations in the second quarter, Facebook posted year-over-year growth rates for revenue and earnings per share (EPS) of 42% and 32%, respectively. The sell-off and subsequent bottom-line growth have made the stock reasonably priced as compared to the greater market, as shares now trade at 20 times earnings versus the S&P 500 index's average price of 18 times earnings.

It's likely Facebook's bottom line will continue to grow more slowly than revenue, as the company has a new goal to better police its site, and this will require more employees. But the organization is likely to keep expanding at a rapid clip, and long-term investors should continue to be rewarded.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamal Carnette, CFA owns shares of Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has a disclosure policy.