The case for Facebook hitting $250

September 19, 2016 01:00 PM
As technology continues to propel the markets higher, the social media company with the best growth potential is Facebook (FB).

As technology continues to propel the markets higher, the social media company with the best growth potential is Facebook (FB).

Just four years ago, the stock was trading under $20 per share and some were suggesting that CEO Mark Zuckerberg couldn’t correct the ship.

Now Facebook is trading above $125 and Zuckerberg has propelled the social platform into a cash-generating machine. Profits are rising about three times faster than sales. It’s the leading social network for mobile advertising on earth, and it’s expected to capture 20.3% of all mobile ad spending in 2017, according to eMarketer. 

The company’s advertising business continues to  grow rapidly. Last year, revenue increased by 44% year- -over-year, and it’s showing little sign of slowing down; eMarketer projects the firm will capture 73.4% of U.S. social network ad spending, approximately $9.86 billion. By comparison, second place Twitter will capture just 13.8% of U.S. social network ad spending.

Meanwhile, Facebook’s user growth has been tremendous. It now has a monthly active user base north of 1.7 billion people. That’s more users than the populations of China and the United States combined.

Facebook is the dominant U.S. social media outlet with more than half of Americans using Facebook at least once a month. These statistics explain why FB is experiencing soaring sales and profits. FB could hit $250 per share by 2020, particularly as the company continues to make extremely effective use of app-ads, video, Instagram, and an emerging platform.

Three major acquisitions are propelling Facebook’s growth: WhatsApp, Instagram and Oculus VR. Investors initialy criticized FB for buying mobile application WhatsApp for $19 billion, but WhatsApp has been a remarkable driver of user growth around the globe, with roughly one billion users in February, up from 700 million in January, according to Statista. If the company is able to generate $10-per-year in sales from each WhatsApp user – a viable proposition – that would translate into $10 billion in new annual revenue.

Next is Instagram, a company that Zuckerberg purchased for $1 billion in 2012. Though the company had just 30 million users and generated no revenue, Zuckerberg saw tremendous opportunity in buying this photo-sharing application. Today, it has 400 million monthly active users, and has turned into a source of significant revenue. By itself, it has the second-largest U.S. social media audience with 89.4 million monthly users. And it’s extremely profitable. Analysts project that Instagram generated as much as $750 million last year alone. In fact, eMarketer predicts that Instagram will generate 10% of Facebook’s total ad revenue by 2017. 

But the platform that has incredible potential to boost Facebook stock is its commitment to virtual reality (VR). FB purchased Oculus VR for $2 billion in 2014, an acquisition that drew significant skepticism at first.

But Facebook’s dive into VR prompted a significant investment boost to the sector in Silicon Valley. In the six quarters before the Oculus deal, venture capital committed $316 million over 50 investments in the space. In the six quarters after, venture capital committed $1.1 billion in more than 91 investments. VR may not be a mainstay consumer product right now, but wait for this explosion to take place when consumer sets continue to rollout. By 2020, intelligence firm Tractica projects that global sales revenue for VR accessories, head-mounted displays and content will total $21.8 billion.

Expect Facebook to generate significant ad revenue through this technology as it matures.

Facebook is a stock to own for the long term, and one that can double in the next four years.

About the Author

Michael A. Robinson is defense and technology specialist for Money Morning.