Recently, I sat down with a couple of (non-investing) friends and — inevitably — they asked what stocks I liked heading into 2015. When I mentioned that I intended to significantly increase my allocation toward Facebook (META 0.14%), they seemed genuinely surprised. "Why would you buy Facebook stock when it's so expensive, and the service is losing popularity with the younger generation?" they asked.
Below, I'd like to examine my friends' concerns, and explain exactly why I think Facebook stock will continue to outperform the S&P 500 over the coming decade.
Legitimate concerns
Let's first focus on the fact that Facebook is having trouble gaining the same kind of traction it used to with teenagers.
As a high school football coach myself, I'm pretty aware that Facebook is no longer the go-to app or website that it used to be just five years ago. In its place are Twitter (TWTR) and SnapChat — or at least that's what the teenage boys in Wisconsin are using the most. As fellow Fool Jamal Carnette recently demonstrated, the percentage of teens using Facebook has fallen 25% in the past three years alone!
But here's the thing: that trend has done absolutely nothing to hurt Facebook's ability to pull in top dollar for its advertising space. While teens may continue to migrate, older — perhaps wealthier — adults are still adopting the site into their daily routine.
Facebook's popularity isn't being diminished among the older crowd. Photo: Sigismund von Dobschütz
And though digital advertising accounts for about half of all impressions people see today, spending on digital advertising sits only at about 28%. It won't stay like that for long. The continued migration of advertising dollars toward digital outlets will only help Facebook continue to increase revenue.
Aiming for something no one else can see
The second drawback my friends' noted is also legitimate: Facebook stock is expensive. Currently, shares are trading for 55 times earnings — a significant premium to the S&P 500.
But to that, I say this: the very best companies of our time will almost always have extremely expensive stocks, and Facebook stock is no exception.
Why do I have so much confidence in Facebook's future?
Let me start by sharing a quote that Motley Fool co-founder David Gardner first shared with me which helps inform his investing decisions.
Quozio
Anyone who knows the Facebook story knows that CEO Mark Zuckerberg saw what social media could be before anyone else in the industry. It would be easy to say that this "genius" move has now come and gone, but I don't think that's the case.
Remember back to April 2012 when Zuckerberg paid $1 billion for Instagram? At the time, it seemed like there might be a mini-revolt on Wall Street. Instagram had 13 employees, 30 million users, and absolutely no revenue. Many were wondering if the wunderkind was cut out to be a big-time CEO.
Fast-forward to today and the move looks brilliant. In just 32 months, Instagram's user-base has increased by a factor of 10 to 300 million! The company hosts ads and brings in revenue — though specific figures haven't been released. And just last week, Citigroup said that it pegs Instagram's value at a whopping $35 billion.
It turns out Zuckerberg wasn't crazy after all; he was just shooting for a target few of us could see.
What's next?
While the purchase of Instagram has played out quite nicely for the company, that alone isn't what excites me about Facebook's future.
Earlier this year, Facebook doled out $19 billion for WhatsApp. The service essentially is an uber-low-cost, worldwide texting — and, soon, voice calling — service.
Zuckerberg has said that WhatsApp will get five years to focus on growing its user base to what could quickly become 1 billion people — many in developing economies — before it needs to start focusing on monetization. By then, users paying just a few dollars per year for the service could generate billions for Facebook, and introduce millions of first-time mobile users to Facebook's ecosystem.
Additionally, I think Zuckerberg's purchase of Oculus Rift — a virtual reality company — could be the real coup. The deal closed this summer — worth about $2 billion. While I have no personal experience with Oculus, Motley Fool co-founder and CEO Tom Gardner tweeted this about the company's product in July:
In the end, this all leads me to one conclusion: we are seeing genius in action here, folks. As an investor, I want in on that. And that's why I'm buying Facebook stock in 2015.
