Facebook Inc (NASDAQ:FB) stock has the potential to gain more than 20% in the next year on the back of its growing ad revenues through its several platforms, stated a recent report from Barron’s. Despite the positive tone, Facebook’s stock was in the red on Monday.
More products to show ads on
For the second quarter, the social networking giant reported advertising revenues of $6.34 billion, a jump of 63% year over year. In recent times, the company has witnessed a sharp acceleration in ad revenue growth thanks to its rising mobile ad load, or the number of ads that it shows to users.
Apart from its core platform, the Menlo Park, the Calif.-based company is also increasing its ad load through its other products – WhatsApp, Instagram and the Messenger app. All these products have yet to realize the benefits of advertisements, noted Barron’s.
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Analysts expect Facebook Inc (NASDAQ:FB)’s daily average users to swell to 1.7 billion from 1.1 billion currently. Barron’s believes the social media giant will grow its ads rate along with the increase in daily average users, thus helping it generate higher revenues on a greater number of advertisements.
Facebook (FB) defies the trend
For the first half of the year, Facebook’s revenues increased by 56% year over year. Barron’s notes that as they grow in size, companies typically grow more slowly. However, “Facebook’s growth was an acceleration from the first half of last year,” when its revenue was up 40%. Using standard accounting, Facebook Inc (NASDAQ:FB) earnings for the first half more than doubled; when using “Facebook’s preferred math,” it improved 89%.
“Growth has been quickening, too, catching analysts by surprise,” says Barron’s.
During the first two quarters of this year, the social media giant exceeded the earnings estimate by an average of 22% compared to 5% for the same two quarters last year. Additionally, earnings estimates from analysts “have been galloping higher,” says Barron’s. About three years ago, only a few analysts were “willing to publish distant predictions guessed” that the company could hit over $2 in 2017.
Unlike expectations, the consensus jumped to $3.78 last year, and now more than 40 analysts expect the social media giant to post, on average, earnings of $5.02 next year.
“Investors holding out for a buying opportunity in Facebook Inc (NASDAQ:FB) stock have watched it rise another 19% so far this year,” notes Barron’s. But the price to earnings ratio for 2017 has actually dropped – from 28 at the end of last year to 25 recently.
One concern remains
There is, however, one concern: Facebook’s declining appeal among the young. It is largely believed that users under 25 years old are spending less of their mobile time on Facebook Inc (NASDAQ:FB) than users of other age groups. Nevertheless, Barron’s believes the social media giant could still hit $153 a share in a year. It’s an attractive premium for sure, but not very outlandish, considering that investors are paying generously for rare things like predictability, growth and yield, the report notes.
“Of course, there’s no guarantee Facebook Inc (NASDAQ:FB) will meet expectations, but the list of reasons for doubt is dwindling,” says Barron’s.