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Does Facebook's Video Strategy Make It a Top Growth Stock?

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Yesterday, Facebook was assigned a Buy rating by BTIG analyst Rich Greenfield, who was quoted by media reports saying, “Not having a buy [rating] on Facebook has clearly been a mistake in 2017.” He further added that “the secular trends toward mobile devices globally and the accelerating shift of ad dollars are simply too strong to ignore.”

Facebook’s Video Strategy

Since last year, Facebook has been aggressively promoting live video content on its platform. Online video is emerging as a big opportunity to boost ad revenues. Ad revenues contribute over 95% to Facebook’s total revenue. Earlier, it was reported that the company is looking to grab a share of the reportedly $70 billion brand advertising that is allocated to linear TV by increasing video content on its platform.  At its last earnings call, Facebook said that video has emerged as a “megatrend” on the same lines like mobile.

Last year, the company signed deals with media houses and Internet celebrities to churn out more content for its live platform and added a plethora of new features to Facebook live.  These include enabling broadcast for a Group or Event and at the same time allowing audience to respond to the live broadcast in real time through Live Reactions. Also, recently, it brought on board an ex-MTV executive, Mina Lefevre, to increase original live video content on the platform.

In fact, it has been on a signing spree to bring more live video content, especially sports. Streaming, particularly live sports, is one of the most lucrative opportunities as it helps to boost engagement levels (especially millennials) and brings more advertisers. Facebook has struck a deal with MLB and has collaborated with Univision Communications Inc. to live stream 46 Liga MX games for an undisclosed amount.

Mobile and live video efforts are paying off big time for the social media giant.  In the last reported quarter, revenues of $8.8 billion increased 51% year over year. Advertising revenues were $8.629 billion, surging 53% year over year.Mobile ad revenues in the quarter were $7.2 billion (up 61% year over year), contributing 84% to total ad revenues.

Even Instagram has emerged as a big cash cow with over 500,000 advertisers. It is the second big ad platform after Facebook’s namesake platform, though the company has so far refrained from providing actual ad numbers for Instagram. The latest Instagram-feature “Stories”, though a Snapchat (SNAP - Free Report) clone, looks set to lure more advertisers this year. Instagram boasts over 600 million MAUs and over 400 million DAUs while “Stories” on the platform have 150 million daily actives.

At the last earnings call, CEO Mark Zuckerberg continued to emphasize on bringing more video content to the platform. He also informed that the company has been investing on original content and that it will keep doing the same this year as well. Facebook is also beta-testing mid roll ads in its video content to boost its ad revenues.

Though Facebook’s video strategy looks good on paper, it will be one big task to actually make it work given a number of challenges. Per media reports, “professional content producers, such as CNN, HBO and Comedy Central, presents a higher quality, which garners deeper engagement and ad dollars” and this where Facebook might suffer. Also, the competition for ad dollars from the likes of Alphabet’s (GOOGL - Free Report) YouTube, Twitter and Snapchat is also unnerving.

Plus, the fake news dissemination problem on its platform has been a raging controversy all through the last year. Fake news problem will definitely impact attracting advertisers.

Our Take

Continuous rise in advertising revenues as well as its strategic efforts to sustain the growth momentum has put Facebook on investors' favorite stock pick list. Notably, in the past one year, Facebook’s shares have generated a return of 23.39%, compared with the Zacks Internet Services industry’s return of 9.11%.

Furthermore, Facebook has a Growth Style Score of “A”. We note that our Growth Style Score encompasses all the essential metrics from a company’s financial statements to get a true sense of the quality and sustainability of growth. Moreover, our research shows that stocks with Growth Style Scores of ‘A’ or ‘B’ has high chances of growing further.

Therefore, although there are numerous challenges, we believe that Facebook will continue to retain its leadership position in the internet advertising space with its innovative ideas.

At present, Facebook carries a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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