Facebook (NASDAQ:FB) remains one of my best investment ideas, and while I can acknowledge that stock returns weren’t exactly phenomenal for growth/momentum names this year, I believe the upside from adjacent applications to core Facebook in conjunction with healthier profit margins will lead the stock higher.
Unlike Twitter (NYSE:TWTR), the company has remained relevant in the minds of users. FB has implemented various ad technologies, platform improvements to sustain relevance in the minds of users and reduced its dependence on the core app to drive growth. However, I also want to acknowledge that there are risks to the stock as it does trade at a heightened valuation (90.9x earnings) when compared to peers.
Despite valuation risk and dependence on continued success in upcoming quarterly earnings, the company is poised to sustain growth due to various open field opportunities via messenger applications, Instagram and VR adoption. I believe these near term drivers to sales/earnings reassert my conviction in my investment thesis. Furthermore, the broad resurgence in equities creates opportunities to buy some of the faster growing companies, as risk appetite for more speculative names has returned.
Near term catalysts to Facebook include the F8 Conference on April 12th and 13th, earnings announcement on April 27th and preliminary sales figures for Oculus Rift.
Recent research from the sell side suggests further momentum in other Facebook products. In a report released on March 31st 2016 by Bank of America Merrill Lynch, the analysts attempt to quantify the immediate upside from WhatsApp and Facebook Messenger:
We assume $5.00 revenue per user per year for Messenger and $4.00 per user per year for WhatsApp (WhatsApp has more emerging market users). Using valuation in the following table, we get a $17bn potential valuation for Messenger and a $18bn for WhatsApp.
Bank of America Merrill Lynch goes onto estimate that WhatsApp will generate $6 billion and FB Messenger will generate $5 billion. This is driven by the fact that WhatsApp is more of a global messenger application with different revenue contribution and has the potential to build into a larger user pool when compared to Messenger. FB Messenger will be monetized first, so the build-up of average revenue per user drives ARPU assumptions above WhatsApp. However, given enough time WhatsApp’s ARPU metric will compare favourably to the core FB application.
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