Facebook A Buy As Growth Levels Off

As Facebook’s (FB) earnings report was released on January 28, it verified exactly what Mark Zuckerberg had forecasted a quarter ago: growing ad revenue mixed with rising costs as the company looks toward the future with its long-term investments.

In its earnings report, the social media giant posted $3.85 billion in revenues, beating the analyst expectation of $3.78 billion (putting together an impressive 49% increase from last year). Earnings per share, however, came in at $0.25, falling short of analyst expectations by $0.08, despite a 25% increase year-over-year. 

Depressed Growth

The major concern here is that while ad revenue is growing, the growth rate is slowing. Peaking at 82% during the first quarter of 2014, it was down to 53% for the fourth quarter, marking a downward trend just as sharp as the upward trend over the previous couple of years.

Additionally, engagement on the company’s core site has finally started to level off. Facebook saw only a 3% increase of daily active users on its core website during the quarter, the lowest growth since 2012. Furthermore, the share of users who visit daily remained flat at 64% during the quarter, something that hasn’t happened since the social media company went public over two years ago.

As user growth plateaus, advertising revenue is sure to follow.

A Word on Those Costs

CFO Dave Wehner predicted costs could increase as much as 55%–75% over the year, and so far the company is getting ahead of the game with total expenses up 87% to $2.7 billion. 

But here’s the reason why this doesn’t worry me one bit. Everyone has been talking about the eventual plateau of user and advertising growth. And the fact that Facebook is getting ahead of the game with investing to build a moat around its core product shows me that this is still a company worth investing in for the long-term.

Instagram and WhatsApp are two big reasons for that. There are other investments I’ve made mention of before, such as drones, Facebook at Work, and the new Facebook Groups app. And perhaps the most exciting of them all is Oculus, a virtual-reality company Facebook acquired last year for $2 billion, which is purportedly expected to begin creating virtual reality movies. That investment alone has the potential to create fantastic long-term value for shareholders.

Bottom Line

Facebook’s stock price is down 2.5% since last week’s earnings report, and it’s only seen a 1.07% gain since Zuckerberg announced it would be drastically increasing costs this year. It shouldn’t surprise anyone to see user growth continue to level off throughout the year and ad growth to possibly continue to decline as it has. But this is to be expected.

But if anyone can truly see and understand what Facebook is doing to build upon the success it already has by expanding its social media and messaging presence and wisely breaking into other operations, it makes sense to say that Facebook is a “Buy” right now.