Facebook (FB:NASDAQ) capped off 2015 with share prices just shy of historic highs, continuing its streak of domination in the social media industry with a portfolio of platforms that numbered billions amongst its users. The company’s ambitious monetization plans and investments such as Oculus and WhatsApp are looking more impressive as time goes by. With all this and more on the slate for 2016, company shares could cruise even higher over the medium-term.
Big Plans for 2016
Facebook has been working on monetizing all of its platforms for years. Facebook already generates billions in advertising, reaping $2.12 billion from North America alone in the third quarter of 2015 while working on introducing advertising opportunities into Instagram, with early indications showing potential for millions in revenue in 2016 alone. Instagram has over 400 million users, already more than Twitter, and looks set to retain its impressive user growth.
Facebook has also been highly successful in the messaging sector, with two mobile apps that each count almost 1 billion users. Facebook’s native messenger app, which the company spun off the main platform, already has 800 million monthly active users (MAU). It falls second only to WhatsApp, which the company also owns and currently boasts 900 million MAUs. The company has been slow to move into monetizing these apps, but has already allowed for companies to begin to interact with customers. 2016 should see Facebook bring those plans closer to fruition with full monetization.
Facebook is also looking to cash in on another recent investment—Oculus. The virtual reality (VR) company has finally begun taking preorders for their VR headset and plans to fully roll out the systems to consumers by the end of 2016. The device, while aimed squarely at video games currently, has potential in several different areas, including education, medicine, and—Facebook hopes—social media. Preorders have already far exceeded existing supply and the device has a chance to take a lion’s share of the emerging VR market. Estimates currently point to VR potentially generating nearly $22 billion in revenues by 2020.
Facebook’s most interesting gamble in 2016 will be the continuation of its “Free Basics” initiative spearheaded by its organization Internet.org. The program offers a free, limited version of the internet for people in countries with little or no access to the internet. Already launched in several emerging markets, the project could be a potential gold mine for the future of Facebook. However, recent struggles in India and Egypt have brought negative light on the initiative.
Recently the project hit a major roadblock in India, where concerns over the service’s perceived violations of net neutrality, with protesters claiming that Facebook is essentially rigging the game in their favor by prioritizing their services over other potentially important content. Tech companies and other citizens have been vocal in their disapproval and the Government has suspended the service pending a review of its impact.
Should Facebook succeed in their entry into India, however, the company could potentially change the game. India is already the world’s second largest internet market, and with China firmly in the hands of local companies, Facebook could gain access to nearly 350 million users already online. Moreover, it enables the company to tap into a large base of mobile phone owners considering 26% of Indians own smartphones and that number is likely to continue growing rapidly. All in all, Facebook could drastically expand its already dominant user base of over 1.5 billion.
The Fundamental Picture
Fundamentally Facebook remains sound even though shares have gotten off to a rocky start in 2016 as concerns about monetary policy combined with fears that the technology industry is about to undergo a rapid correction heightens the risks. Year-to-date, shares have plunged -6.83%, in stark contrast to 2015’s blockbuster gains as valuation concerns dominate the discourse. Facebook is among the most highly valued stocks globally, boasting a market capitalization of $275.28 billion and a price-to-earnings ratio of 98.49. This level of valuation is only matched by very few ecommerce companies and typically only represents very high growth companies. However, with the company growing net income by 100% between fiscal year 2013 and 2014, the momentum is certainly there.
Revenues at Facebook continue to climb, adding to a strong cash flow picture with net operating cash flow rising steadily since the initial offering while revenues have largely mirrored the trend higher. Although the company currently offers no dividend, Facebook has minimal debt compared to the sheer size of its balance sheet. Should revenues continue growing at the current stable pace, it is not unreasonable to believe that earnings will echo this momentum. While shares could see a more sustained pullback, especially amid a broader market rout and after a strong finish to 2015, efforts to ramp up monetization efforts should contribute to upside in shares towards $115-120 over the medium-term despite near-term potential for shares to reach back towards $90.
Poised to Dominate
With several of Facebook’s efforts over the past few years finally coming to fruition, it seems the company is poised to continue dominating the tech world. The company has already seen share prices soar in 2015, growing by 35% to record highs. Monetization plans on several fronts could be major factors in the company’s continued growth, and a gamble in India could assure Facebook dominance for several years to come. While another year of blockbuster growth is debatable, after a pullback from recent highs, shares will rebound thanks to a number of tailwinds that will exhibit the company’s versatility and ability to better monetize the growing user base.