If you're considering investing in Facebook (FB 2.56%) stock, there are a few things you should definitely know before you plunk down your hard-earned cash on a few shares. With the stock trading near all-time highs, climbing over 44% since the beginning of the year, investors may be hesitant to buy in. Here are a few things you should know to help you make that decision.
Facebook is still thinking long-term
Last quarter, Facebook brought in $2.9 billion between its advertising and payments business. On top of advertising on its main platform, facebook.com, and the Facebook mobile app, Facebook facilitates payments with online game developers such as Zynga and King Digital. Advertising accounted for 92% of revenue last quarter; payments made up the rest.
When it comes to monetizing its other properties, like Instagram, Facebook Messenger, and WhatsApp, management is taking a cautious approach. Instagram ads are limited to big brands with high minimum ad spends. This ensures quality ads that blend into the Instagram experience.
With Messenger and WhatsApp, Mark Zuckerberg noted, "We could take the cheap and easy approach and just try to put ads in or do payments and make some money in the short term, but we're not going to do that." Instead, the company looks to be planning a payments platform built on top of the messaging service.
Internet.org exemplifies the long-term approach
Zuckerberg is heading up a global initiative, Internet.org, to connect the two-thirds of the world without Internet access. While the project will help connect billions of people and potentially improve their lives and their economies, it's not without self-interest. Facebook needs people to be able to connect to the Internet for them to use its products.
This summer, Facebook launched the Internet.org app, which allowed smartphone users in Zambia access essential Internet services for free. Among those services are Facebook and Facebook Messenger. Additionally, Facebook is working with mobile operators to bring Internet sevices to people in the Phillipines, Paraguay, and Tanzania, among others. So far, the group has connected 3 million people who never had Internet access before.
That's still a far cry from the billions without access, which is why Facebook continues to make strategic acquisitions to help connect them in unique ways. It bought a solar power drone company earlier this year to enable long-term unmanned flights above areas with low Internet connectivity. Additionally, the company has purchased small tech companies that relate more readily to improving Internet connections and bandwidth usage.
Facebook is ready to expand its ad business
After purchasing Atlas from Microsoft about a year and a half ago, Facebook is finally ready to put it to use. Facebook announced on Monday that it will use Atlas' technology to allow advertisers to show ads outside facebook.com and its mobile app.
Facebook is using Atlas and its social network to solve a major problem in digital advertising. Instead of using cookies, Facebook is able to tap into users' identifiers attached to a certain device. When a user logs into Facebook on their device or browser, the company knows the identifier attached to that device/broswer and attached it to your Facebook account – just like all other apps do. Then, when an advertiser is running a targeted Atlas campaign it can ask for a specific bucket of users that match its criteria, and Facebook can then flag specific users that can then be targeted through Atlas.
The result could be a huge expansion of ad revenue, particularly on mobile. Last year, Google (GOOG 1.18%) (GOOGL 1.26%) generated over $55 billion in revenue, most of which came from advertising. If Facebook can persuade some Google customers to switch or at least try Facebook's ad network, it could add billions in incremental revenue.
Video ads are coming
This summer Facebook started incorporating autoplay videos into user's timelines. The success of the Ice Bucket Challenge really made the feature take off, and Facebook saw over 100 million new video uploads per month on average over the summer.
The next step for Facebook is to roll out video ads. Much like ads on Instagram, Facebook is taking a cautious approach limiting video ads to big brands with big budgets. The minimum ad spend for the earliest video ads will be $600,000. Zuckerberg told analysts that "the content has to be really good" for these video ads. Only big-budget advertisers are capable of living up to Facebook's expectations.
Video advertising carries a premium over static display advertising. The result should be a slow but steady increase to Facebook's average ad price. The one drawback is that video advertising could be limited on mobile because of data restrictions on wireless networks. Facebook doesn't want to cause users to go over their data limits.
A sky-high valuation
So Facebook's business looks like it's doing well, but is it worth buying Facebook stock? Especially since it's trading near its all-time high?
Trading near 50 times analysts' expected earnings for 2014, Facebook stock is priced well above the market average. But if you factor in Facebook's growth potential, it looks much more attractive. Facebook is still in the early stages of monetizing its flagship platform as exemplified by ad revenue growth drastically outpacing user growth over the past year. Additionally, it's just rolling out an ad network now. Finally, it's yet to monetize any of its satellite properties.
Analysts expect Facebook to grow at a 37.7% clip over the next five years, putting its PEG ratio around 1.3. That's right in line with Google, and well below Twitter and LinkedIn. So, despite Facebook's 44% year-to-date climb, it looks like just as good of an investment as any of its peers right now, if not better.
