Source: Facebook.
After the stock stumbled 6% on earnings last month, Facebook (META -0.52%) might be a little lacking in the investor confidence department right now. Investors seem concerned about rising costs in the coming year as the social network aggressively spends on future growth opportunities such as video ads and further international expansion.
I happen to think the pullback is a clear buying opportunity, and I'm not the only one.
Word on the Street
Morgan Stanley analyst Benjamin Swinburne posted a new research note on Monday, initiating coverage on a handful of big names in tech, including Facebook. Facebook earned an overweight rating alongside a $90 price target, suggesting over 20% upside from current levels. That's more bullish than the neutral ratings Swinburne assigned to Google and Twitter. Interestingly enough, the analyst optimism isn't helping shares, which are down 1.5% as of this writing Monday.
Overall U.S. advertising spending in recent years has not outpaced GDP growth, as it historically has, which has important implications for Google, Facebook, and Twitter. Online advertising spending might well have peaked, but the secular shift from desktop to mobile is just beginning. Swinburne said he believes this transition is "still in its infancy." Additionally, online video ad revenue is just 2% to 3% of the market, a figure that is only expected to rise going forward.
Facebook is the primary driver in this rapid shift to mobile advertising, and the company continues to invest in developing richer experiences (such as video) for its advertising customers. The company enjoys a disproportionate share of time spent on mobile devices -- 20% in the U.S. by Morgan Stanley's estimates. The analyst expects Facebook to grow its global display ad market share from the present 20% to over 30% by 2018.
While Facebook's cost forecast for 2015 is rattling shareholders, the company has incredible operating leverage, and margins will expand once the spending phase mitigates in 2016. That's simply the nature of investing in future growth: margin contraction followed by margin expansion.
Facebook is as big as the most populous nation on Earth
Facebook has unprecedented scale at 1.35 billion monthly active users, at last count, which Swinburne noted is roughly the population of China. That's nearly half of the global Internet user base, and Facebook is helping to bring more people online through initiatives such as Internet.org, in which the company provides free access to its site in select emerging markets.
While the analyst is bullish on Facebook's long-term prospects, Swinburne said he believes a better entry point is possible. I agree, and am actively looking to add to my personal position if shares remain weak in the near term. I called it a buying opportunity, and I'm prepared to put my money where my mouth is.
