Facebook: Trying To Raise The Top Line

| About: Facebook (FB)


In an effort to beef up the profit centers, Facebook is looking at different ways to get their users engaged even more.

Facebook itself is up 8.4% since the start of December.

Facebook is definitely an excellent stock to own in any portfolio right now in my eyes.

With the Dow Industrials index struggling to cross the psychological barrier of 20,000, the Nasdaq has been quietly making new all-time highs. The Nasdaq has been able to make these new highs with the newfound optimism investors have now for the "FANG" stocks. One such beneficiary of the all-time highs is the F in FANG, Facebook (NASDAQ:FB).

After investors used it as an ATM machine and sold the stock to put their money to use in industrial stocks, they have now rotated their funds back into the social media giant. It is this rotation that makes it important to evaluate what has been happening at the company lately to see if the upward movement in the stock can continue to take place.

During the time of the presidential election, there was mass hysteria about news outlets publishing fake news reports and Facebook was not immune to the dilemma. Having been dragged into the situation, Facebook is taking a proactive approach by attempting to patent a technology platform, which will automate the method by which fake news will be removed from its network. The company has professed that the coming year will be one which the company will increase capital expenditures.

This news of automating the method to remove fake news should come as no surprise that it may be one of those capex efforts. Though removing fake news may not be a profit center, it is important to steer fake news from its networks so that the user doesn't become repulsed by it and stay away from the network entirely.

In an effort to beef up the profit centers, Facebook is looking at different ways to get their users engaged even more. The Instagram property, which uses Instagram Stories as a method to engage the users has just 18% of the user base using the product on a daily basis per a survey performed by RBC Capital. The number on a monthly basis for Stories increases to 53%. Stories, which was released in the late summer, is Facebook's answer to Snapchat where pictures and videos are only available for 24 hours.

From the initial numbers, it looks like users are adopting the feature at a rate that is in-line with what management was expecting. What this means is that increased ads can begin to roll into the top line. With this feature though there is the concern of cannibalization of ad revenues from Facebook's other properties. As the user spends more time on Stories, it pulls them away from their actual Facebook feeds. But this may not be an issue as Instagram is now probably more popular than the parent's original property, but at the same time, it is stealing away users who otherwise would be using Snapchat.

In addition to the fake news drama late last year, the company was mired in a little metrics situation where they were over-reporting some of their key metrics. But since that time, the company has come forward and done a lot more to become more transparent in how they calculate those metrics.

The estimated reach tool that tries to calculate potential audience sizes is being revamped to include streaming reaches for Live Videos and modifying the formula for Reactions on Post. With the revamped tools advertisers should be in a better position to capitalize on the result metrics to increase their sales; this can potentially increase Facebook's top line numbers as well.

As I stated earlier, there has been quite a bit of strength in the FANG related names during the past couple of weeks, but it didn't just start at the turn of the calendar. The phenomena of selling off the industrial stocks for the FANG names has been taking place since early December. The Industrial Select Sector ETF (NYSEARCA:XLI) is up just 1.3% since December 1st while the PowerShares QQQ ETF (NASDAQ:QQQ) is up 4.8%.

This is important because more than a third of the holdings in the QQQ ETF are comprised of the large cap tech names: Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Facebook, and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). What this means is that the money is now flowing back into the FANG names. Facebook itself is up 8.4% in that time alone.

Facebook is definitely an excellent stock to own in any portfolio right now in my eyes. The company has been growing revenues year after year and has an all-star management team. Not only do they have great properties right now, but I believe they will continue to spend accordingly for earnings growth for the future. The company is always trying new things whether it be through virtual reality or artificial intelligence and I believe in management right now.

Raymond James just increased its rating on the company from "outperform" to "strong buy" because they see some strength in ad spending coming their way, and improved ad results thanks to the metrics transparency I discussed earlier. The stock is trading at just 25x forward earnings estimates, and with a near-term earnings growth rate of 26.4%, I believe it is pretty inexpensive. The one problem that might plague the company going forward is that they are loading up the properties with ads and eventually it may become oversaturated, so at a certain point, they will have to figure out how to make the ads more profitable.

I actually initiated my position in Facebook in late November and have been pretty happy with the purchase thus far. I will only be purchasing shares if they are below $111 because I believe that is where Facebook offers additional value. I've selected $111 because it is the average of the 52-week range.

I swapped out of Priceline (NASDAQ: PCLN) for Facebook during the 2016 fourth quarter portfolio change-out because I ended up turning a profit in the name (32.7%, or 33% annualized) and wanted to lock in those gains. Since the swap, I have made out on some gains as Facebook has outpaced Priceline. For now, here is a chart to compare how Facebook and Priceline have done against each other and the S&P 500 since I swapped the names.

When it is all said and done, it matters what the stock has done in an investor's portfolio. For me Facebook is one of my larger positions and has been doing well as I'm up 5.6% on the name while the position occupies roughly 9.3% of my portfolio. I will make purchases in the stock only if it is below $111.

I own Facebook for the growth portion of my portfolio and I will continue to hold onto the stock for now. My portfolio is up 12.7% since inception while the S&P 500 is up 9.4%. Below is a quick glance at my portfolio and how each position is performing. Thanks for reading and I look forward to your comments.



% Change incl. DIV

% of Portfolio

Electronic Arts Inc.




Eaton Vance Corp.




Facebook, Inc.



AbbVie Inc.




The Home Depot, Inc.




Starbucks Corporation




General Electric Company




Diageo plc




Skyworks Solutions Inc.




V.F. Corporation




Silver Wheaton Corp.




Gilead Sciences Inc.







Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long FB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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