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Robert Stephens, CFA
Robert Stephens, CFA
Articles (230) 

Why Facebook Is a Buy

The company’s strategy could stimulate significant growth

September 05, 2019 | About:

Facebook (NASDAQ:FB)’s plans to facilitate payments between its users could boost its long-term growth prospects.

The social media giant is also aiming to improve its users' experience through its investment in new technology, while its plans to enhance its business offerings could strengthen its competitive advantage.

The stock’s valuation and growth prospects suggest that it could have further upside, even following a 12% rise in the last year.

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Improving social experience

The company’s ongoing investment in its augmented and virtual reality products could differentiate it from its peers. These products will allow users to feel that they are in the presence of another person when making their social interactions. Facebook expects this to increase the amount of time its users spend on its platforms, as well as boost the amount of content purchased by its customers.

Facebook’s investment in augmented and virtual reality products is focused on lowering the cost of the technology for its users. For example, in its most recent quarter it shipped Oculus Quest, which is its first all-in-one headset. It retails at an all-inclusive price of $400. This price compares favorably with the company’s previous offerings, which also required the use of a high-powered PC for tethering purposes. The company’s simpler, cheaper and more powerful products could increase accessibility and itake-up across its customer base.

Payment potential

The company’s focus on facilitating payments between its users could prove highly profitable. Facebook is currently testing payments on its WhatsApp platform in India, aiming to launch payments across multiple regions in the future. Its payment system should make sending money between consumers and businesses as simple as sending an online photo. This could improve the user experience versus existing payment platforms and provide Facebook with a competitive advantage in the payments industry.

In addition, Facebook is part of the Libra Association. This consists of 28 organizations that plan to create a new cryptocurrency called Libra, which will Facebook will support across its services. The company expects Libra to empower consumers across the world who have access to its services, but who are unable to open a bank account. With an estimated 2 billion people across the world lacking access to the current global payments system, Facebook has a large total addressable market in which to gain market share.

Possible threats

Facebook’s financial prospects could be negatively affected by privacy concerns among its users. It agreed to pay a $5 billion fine to settle a Federal Trade Commission investigation in July, and was also required to make major changes to how it manages the data of its users. For example, it must expand its privacy program, include additional management oversight and enhance its reporting to become more transparent.

The company expects that it will need to make significant investments in improved infrastructure to meet the demands. It also anticipates that the changes will slow its development of new products while it focuses its capital on addressing privacy concerns.

In response, the company is seeking to strengthen its financial performance through further investment in its business offerings. For example, in May it introduced automated ads where businesses answer a small number of questions to have access to a customized marketing plan.

In addition, last quarter it launched its latest variation of dynamic ads that improve customer engagement levels through refreshing the ads that its users see more frequently. This leads to more relevant ads and a higher return on investment for businesses that advertise on the company’s platform. 

Outlook

Facebook is forecast to record a rise in its earnings per share of 51% in its next fiscal year. Its forward price-earnings ratio of 29.5 suggests that it offers good value for money.

Disclosure: the author has no position in any stocks mentioned.

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