3 Ways Facebook Inc (FB) Stock Could Lose Its Fangs

 investorplace.com  4/21/2017 3:37:15 PM 

Scroll through the latest 10 articles on InvestorPlace.com about Facebook Inc (NASDAQ:FB) and it becomes pretty evident that most, if not all, of the contributors writing about FB stock, are fans of Mark Zuckerberg and company.

3 Ways Facebook Inc (FB) Stock Could Lose Its Fangs

Source: Shutterstock

So am I. Heck, I’ve written positive stories about Facebook as recently as March 21 and March 2. Even at 40 times earnings, I’m a fan of Facebook stock.

Do an online search of Facebook stock and you get the same positive vibe, although that’s changed slightly in recent days due to the disturbing Cleveland murder video that appeared on Facebook for two hours before the company took it down.

If anything stop Facebook stock, a macabre video appearing on the social media site is a start, but people have short memories, so that’s probably not going to be enough to stop FB stock in its tracks — up 25% year-to-date through April 21. No, the only way that Facebook stock retreats are if earnings in the next couple of quarters underwhelm or the markets tank, neither of which appears to be in the cards right now.

But if FB stock were to get defanged, this is how it would happen:

First Way FB Stock Gets Defanged

It’s a longshot but if Snapchat parent Snap Inc (NYSE:SNAP) were to make a profit that would be a sure sign it was making progress in its fight to be the world’s most dominant social media site.

Snapchat isn’t projected to make a profit until at least 2020, if ever. Generating $2.15 in average revenue per user (ARPU) in North America in the first three months of 2016 compared to Facebook’s ARPU of $24.61 in the same period and you get an idea how steep a climb Snap faces.

Not everyone is pessimistic about Snapchat’s future. At the end of March, Cowen analyst John Blackledge initiated coverage of the stock giving it an “outperform” rating and a 12-month price target of $26, about 30% above where it’s currently trading:

“SNAP is a leading social / messaging service and we expect share upside based on ramping ad monetization, with SNAP’s share of WW mobile ad (x-China) rising from 1% to 5% ’17-’22E. SNAP should generate high incremental margins as it scales. SNAP is trading at 16x EV/Sales on our ’18 estimates vs. 8x for FB. We initiate coverage with an Outperform and $26 PT.”

Most FB investors aren’t worried about Snap at the moment, but if the company continues to grow ARPU — Blackledge estimates that it will increase from $6 in 2017 to $27 (35% CAGR) by 2022 — eventually, it could make money and if that happens, Facebook’s thumbs up will inevitably disappear.

Second Way FB Stock Gets Defanged

InvestorPlace contributor Lawrence Meyers did a good job recently explaining why Facebook stock keeps going higher. I won’t get into all the details, but he also mentions three ways FB stock could get tripped up: 1) a better advertising mousetrap is developed; 2) its user numbers are inflated, and 3) a severe recession kills its advertising revenue.

Of the three possibilities, I would say that the first is the most unlikely. Note I didn’t say impossible, but difficult to imagine nonetheless. Facebook is one of those once-in-a-lifetime products that come along that leaves you wondering why you didn’t think of it.

The third option is a realistic possibility, but of course, this would hurt all social media apps and not just Facebook. As Meyers suggests, FB has almost $30 billion in cash short-term investments and generates $11.6 billion in annual free cash flow. It is Fort Knox-solid.

So that leaves us with the second possibility that its user numbers are wrong.

Next Page

Article printed from InvestorPlace Media, http://investorplace.com/2017/04/3-reasons-why-facebook-inc-fb-stock-will-lose-its-fangs/.

©2017 InvestorPlace Media, LLC

« Go back