Facebook (FB 1.02% ) is growing rapidly, sometimes to the detriment of user privacy. Governments and regulators are taking notice and taking action, imposing fines and mandating improvements to privacy and data protection.
Although it faces headwinds, the opportunities ahead are promising enough for investors looking for a great tech stock with incredible growth.
Its ability to collect data
The social media giant offers advertisers incredibly sophisticated ways to reach a targeted audience. This may be the reason why around 140 million businesses use Facebook’s services to reach potential customers. The level of detailed information that Facebook knows about its users is unmatched. This data allows marketers to deliver messages to a targeted audience, making more efficient use of advertising dollars.
The ability to reach a specific set of individuals that Facebook and its portfolio of apps create, gives businesses the ability to generate quality leads, build brand awareness and close sales, all with limited wasted advertisements presented to those who would be unlikely customers.
Facebook is growing at a remarkable rate. Over the past three years, it has compounded annual revenue at a rate of 46%. What’s even more impressive is achieving this type of top line growth while maintaining net profit margins above 25%. The ability to grow revenue profitably is a significant advantage for those looking to invest in Facebook.
Revenue and net income growth is expected to continue next year, increasing by 22% and 43% respectively. The revenue increase would represent a notable deceleration from the recent three-year rate. Years of profitable growth have built a pristine balance sheet for Facebook, with $52 billion in cash and zero debt. The strength of a balance sheet means it has the cash to defend its competitive position or to invest in new developments.
Facebook may also use the money for share buybacks, which will boost the stock price. Additionally, when the investment horizon is long-term, a strong balance sheet increases the chances that the company can survive one or more economic downturns.
Potential for additional revenue streams
Facebook is gradually integrating its Messenger app into the revenue-generating mix. During the company’s latest conference call, COO Sheryl Sandberg said, “Messaging is one of the fastest growing areas of online communication, especially between businesses and individuals. We have seen businesses use Messenger to reach customers, generate new leads, and even sell cars.” Above all, it demonstrates the value Messenger can bring to businesses: the ability to meet customers where they are, rather than waiting for them to come to you.
WhatsApp and Messenger have significant revenue generation potential. With 1.6 billion and 1.3 billion monthly active users respectively, increasing monetization can move the needle for Facebook.
What this means for investors
The biggest risk Facebook faces government regulation. His settlement with the Federal Trade Commission in July 2019 included two significant setbacks. First, the company had to pay a record $5 billion fine. Second, it had to agree to overhaul its privacy protections, which will lead to increased spending for the foreseeable future.
With Facebook, investors can own a business that is growing incredibly rapidly in revenue, with significant untapped growth potential. Admittedly, holding the title is not without risk. The challenges facing increased government regulation have the potential to hamper this giant. However, the opportunities ahead justify taking a risk in this technology stock.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.