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Time To Like Facebook!

Shares of the largest social network have dropped substantially from a high of $72 to a recent price of $59 in a matter of weeks. Interestingly, there has been no news which has changed its compelling growth story.  Facebook has made a couple of large acquistions recently; messaging service Whatsapp for $19 billion and virtual reality goggle maker Oculus for $2 billion. The market reacted favorably to the Whatsapp purchase sending Facebook shares significantly higher following the deal. The market reacted less favorably to the Oculus deal, as Facebook shares started their recent decline after that news. But the recent downtrend in shares of Facebook, which have knocked off $33 billion from its market capitalization, can hardly be explained by its $2 billion Oculus acquisition.

In all likelihood, Facebook shares have been victim to fund flows, which have rotated out of momentum names like Facebook, Netflix, and Amazon into more defensive names. For the patient long-term investor, this current situation represents a fantastic buying opportunity to initiate a position in Facebook.

Facebook has upcoming catalysts, which are likely to add billions in revenue to its coffers. The first of these catalysts is the long awaited release of auto play video ads, and the second is the monetization of Instagram.

The video ads have been rumored to command as much as $2 million per day. This equates to $730 million annually from one video ad. Over time, Facebook will be able to add multiple video ads per day to a user’s news feed. If Facebook is able to add 4 video ads to a user’s news feed, the annual revenue would equate to $2.92 billion. Considering Facebook’s 2013 revenue of $7.87 billion, this additional revenue is quite substantial.

Instagram is another potentially enormous source of revenue for Facebook. Facebook has been patient is monetizing Instagram up until this point, but signs are emerging that its long awaited monetization is gathering momentum. Instagram just announced an ad deal with Omnicom for a commitment for up to $100 million in advertising. This is likely just the beginning as Instagram’s user base has swelled to over 200 million people, up from 150 million just 6 months ago.

Facebook is already benefiting from increased advertising revenue from existing ad formats. In its most recent quarterly report, Facebook informed investors that advertising revenue increased a whopping 72%. Facebook’s current valuation (35 times 2015 earnings) is reasonable just based on its existing ad formats.

With the inevitable benefits of auto play video ads and the monetization of Instagram on the horizon, Facebook is worth your investment dollars.


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