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Nicholas Kitonyi
Nicholas Kitonyi
Articles (297)  | Author's Website |

Why Facebook Video Will Drive Growth

Recent product launches could trigger synergies in video streaming services

Shares of the social media giant Facebook Inc. (NASDAQ:FB) have failed to recover following the second quarter 2018’s disappointing results. The company’s stock sharply dropped more than 20% between July 25 to July 30, this year and have continued to trend downwards since.

Currently, Facebook’s stock is trading at a new 18-month low of about $145 per share and judging by the market sentiment directed towards the social networking company, it could sink further to potentially test the current two-year low of about $115 before things begin to get better.

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It’s times like this when investors should sit back a bit and re-analyze the company’s business outlook and growth drivers that are not maxed out. The company has been dealing with one of its greatest disasters since its formation following the Cambridge Analytica debacle.

While the news came out at the tail-end of the first quarter of 2018, it looks like the impact was well felt in the second quarter results. And as it prepares to announce third quarter results on Aug. 30, investors will be watching closely to gauge how deep the Cambridge Analytica data breach reports might have affected the company’s digital advertising revenue.

Such news events can humble even the biggest of brands, and Facebook certainly, hasn’t been any different. However, the company’s business model is still one of the most disruptive in the market, as advertisers continue to capitalize on the benefits of its massive user-base.

Among the social networking giant’s most promising business units is Facebook Video, which the company seeks to use to drive future growth. Facebook’s video streaming feature which was tweaked in December 2015 to introduce live video has been one of the success stories of the company’s video streaming services. Reports already indicate that more people now watch Facebook videos than they do on Alphabet Inc.’s (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube videos. Experts attribute this shift in roles to the socialized model of the social media giant.

In a report published last month, Facebook now averages more than 8 billion video views per day, which is double the numbers reported last year. These are some of the figures that are likely to get more advertisers excited, which in turn will boost Facebook’s video ad revenue. On the other hand, Statista predicts that Facebook’s video ad revenue in the U.S. will cross $9 billion by the year 2021. Video marketing is crucial to every business that looks to capitalize on the power of social media and this will continue to push businesses to increase their budgets on online video ads, which will work in favor of Facebook, YouTube, Twitter Inc. (NYSE:TWTR) and Snap Inc. (NYSE:SNAP), among others.

And Facebook, being the king of social media, is likely to benefit the most, especially given the recent expansion of its video services. In August 2018, Facebook launched Facebook Watch globally, just over a year after launching in the U.S. Facebook Watch is a video streaming service akin to YouTube where video content creators will split advertising revenue with the social media company 55% (creators) to 45% (Facebook). This is the same sharing ratio Alphabet’s YouTube uses for its content creators.

YouTube monetizes video by including a pre-roll video ad at the beginning of a video stream, which has a minimum of five seconds watch period before the viewer can dismiss them. Facebook, on the other hand, has opted to include such ads in the middle of the video stream, at least after the first five minutes, which analysts have compared to mainstream video advertising channels that usually take a commercial break for advertiser content. Some say this model will resonate well with users.

And this month, Facebook launched video chat devices, which will go on sale in the U.S. in November at a price of $199 for the small version and $349 for the large version. According to the promotional material released via social media channels, Portal, as the device has been branded, will be able to automatically zoom in on users and follow them as they move. It will also be able to hand off calls to and from smartphones and tablets.

One potential upside for Facebook Portal could be pegged on the users’ ability to commercialize the technology. With the social media giant launching Facebook watch globally two months ago, many people will be looking to create premium video content and make money through the ad revenue sharing program.

Facebook portals could be used hassle-free to create such videos at home while at the same time broadcasting or recording to later share on social media. Therefore, soon, Facebook live video, Facebook watch and Portals could begin to yield the company synergies that will help drive video-related revenue.

In summary, with Amazon.com Inc. (NASDAQ:AMZN) having launched an ad-network (Amazon Ad Services) of its own that is already threatening to take on Alphabet’s Google and Apple Inc. (NASDAQ:AAPL) also getting in to gain a share of the market by launching a search engine, perhaps it is about time that the social media giant began to leverage its massive user base to grow revenue in other business units.

Therefore, even given Facebook’s recent woes regarding the data breach and disappointing second-quarter results, the company’s massive decline in stock price could be presenting a good opportunity to buy.

Disclosure: I have no position in the stocks mentioned in this article.

About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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