Facebook’s Conveyor Belt

Facebook’s user growth trends remain on track

Facebook (NASDAQ:FB) stock has been on a tear in 2017, up more than 21% versus a less than 5% gain for the S&P 500. Interestingly, the big move comes against the backdrop of the company’s biggest competitor, Snap Inc. (NYSE:SNAP), making its Wall Street debut in early March. The market is likely realizing that Snap is less of a competitive threat than originally thought, and Facebook is concurrently doing its best to erode Snap’s value proposition. All together, while the stock might be due for some near-term turbulence, we firmly believe the stock will continue to generate significant alpha over the next 12 months.

FB data by YCharts

There has been a lot of positive buzz around Facebook recently. User growth trends remain on track as Facebook Messenger now has 1.2 billion MAUs. The company is also making small but critical steps in building out conversational commerce platforms as WhatsApp is getting set to launch P2P payments in India. The entire Facebook ecosystem continues to put intense pressure on Snap, with News Feed getting a Snap-like makeover and Instagram rolling out Direct.

Facebook also continues to add advertisers to its ecosystem at an impressive rate. Facebook now has 5 million active advertisers, up from 4 million in September, while Instagram recently crossed the 1 million active advertisers threshold. The growth in Facebook’s active advertising base is not slowing, which is thoroughly impressive considering the scale. Meanwhile, Instagram’s still young active advertiser base has quintupled in a year.

Facebook is also unveiling hardware in April, once again following in the footsteps of Snap who launched Spectacles last year. While currently highly speculative, material revenue from any hardware products is likely not baked into the current valuation. If the April reveal is impressive, we could see the stock get a big bump up as the market digests the financial implications.

The one bit of negative news, and definitely something investors should be aware of, can be found in Piper Jaffray’s Spring 2017 Taking Stock With Teens Survey. The results of the survey ostensibly support the thesis that Snap continues to grow in Millennial popularity despite Facebook’s mimicking attempts. From the Fall 2016 survey to the Spring 2017 survey, Snapchat gained 4 percentage points of mind-share while Instagram slipped a percentage point and Facebook slipped 2 percentage points.

These are, however, minute differences, and it’s tough to glean much actionable insight from the data. The current dynamics seem to imply that Instagram Stories and Snap Stories are co-existing, as 18–34 year olds are using them for different purposes. Snapchat is for the more private stuff, while Instagram is for the more public stuff.

All in all, a lot is going right for Facebook right now. While the company’s mimicking efforts aren’t eliminating Snap’s popularity, they certainly are making profound inroads into the market. These active efforts are also opening the eyes of investors, who are beginning to understand that size is king in the social media market. We expect the current dynamics of FB advances, SNAP declines to continue to play out over the next several quarters.

FB data by YCharts

At 21x next year’s consensus earnings estimate, the stock remains fairly cheap considering the outlook is for 20%-plus compounded earnings growth over the next 5 years. That is a fairly attractive PEG profile for a company with great cash flows, a strong balance sheet, and multiple operational tailwinds. In our minds, there are multiple reasons FB stock can and will continue to head higher.

I am/we are long FB.