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Social Media Stocks Poised for Happy New Year

9 December 2015 in Trading Ideas

Facebook Inc (NASDAQ:FB) founder Mark Zuckerberg made headlines recently with his announced plan to eventually donate 99% of his wealth to charity.1

While the current value of that gift — $45 billion in shares of Facebook – seems plentiful enough, it’s possible that Zuckerberg’s generosity will ultimately top that figure – if the company’s stock continues to appreciate significantly over the long term.

That’s not to say Facebook investors haven’t already enjoyed the ride: In its three-plus years as a public company, the stock has gained 176%. Shares are up more than 35% this year.

The rally has helped other social media investments outperform, too. With a nearly 20% weighting in Facebook shares, the Social Networking motif has gained 4% in the past 12 months. In that same time, the S&P 500 has risen 0.1%.

In the last month, the motif has increased 0.2%; the S&P 500 has lost 1.1%.

To be fair, shares of Facebook treaded water for more than a year after the company went public in 2012 – until the company’s quarterly results began convincing investors that the social networking site was succeeding at growing its digital advertising supply to an increasingly mobile-using customer base.

And, now that Facebook has apparently cemented its darling status with investors, many analysts expect next year to be similarly rewarding.

Rosenblatt Securities analyst Martin Pyykkonen, has put a $125 price target on the stock (it was around $105 earlier this week) saying that concerns about increased spending in 2016 are overblown, likening the company’s plans as exactly the strategy that worked for Google, now Alphabet Inc (NASDAQ:GOOGL).2

“We still think Facebook has the opportunity to further increase its dominance, analogous to Alphabet’s early days in core ad search technology,” Pyykkonen wrote, adding that video and Instagram ads will be key for next year.

“Our bullish outlook on Facebook coming into this year was and still is largely based on increasing traction with large brand advertisers, Instagram and auto-play video ads on the core platform, and early but growing social media advertising market development in earlier stage foreign countries,” Pyykkonen wrote.
The analyst estimates Instagram’s global advertising revenue will be more than 10% of the company’s total ad revenue on a run rate basis by the end of next year.

Analysts at Morgan Stanley are similarly optimistic about Facebook next year, citing the rising nexus of social networking and e-commerce – specifically, that companies like Facebook including a “buy button” on retailers’ Facebook pages will increasingly let social take share from conventional shopping.3

“Buy buttons would enable Facebook to move closer to a transaction-based model,” the analysts wrote. “If retailers were willing to bid up Facebook’s retail CPCs [cost per click] to a 5% “implied take rate” on just 3% of enabled US e-commerce, it would add roughly 5% to our 2017 Facebook N. American ad estimate.”
However, Facebook isn’t the only social media company being rewarded with predictions of higher stock prices. Last month, brokerage Monness Crespi & Hardt came to the defense of Twitter (a 16.8% weighting in the Social Networking motif), which probably needed defending, considering the stock is off nearly 32% this year.4

In a research note last month, analyst James Cakmak came out firmly in support of the naming of CEO Jack Dorsey, one of the company’s founders, because “this is the first time we see that management can identify the issues (at least publicly) and present courses of action to institute remedies.”
Cakmak also disagrees with claims that the company has exhausted its advertising base, writing that “we see ample room to augment the base, especially with the roll-out of self-service ads globally in 3Q to attract” the 9 million small-and-medium-sized businesses on the platform. According to Cakmak, “Facebook succeeded with this, so can Twitter.”

Higher ad monetization rates from both companies could be the ideal result for investors in social media stocks.

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1 Vindu Goel and Nick Wingfield, “Mark Zuckerberg Vows to Donate 99% of His Facebook Shares for Charity,” nytimes.com, Dec. 1, 2015, http://www.nytimes.com/2015/12/02/technology/mark-zuckerberg-facebook-charity.html, (accessed Dec. 7, 2015).
2 Tersa Rivas, “Facebook Will Outperform Again In 2016: Rosenblatt Securities,” barrons.com, Dec. 2, 2015.
3 Tiernan Ray, “Google, Facebook, Visa To Benefit as Social Commerce Rises, Says Morgan Stanley,” barrons.com, Nov. 24, 2015.
4 Tiernan Ray, “Twitter” Monness Crespi Defends Against Advertiser, Facebook, Off-Network Concerns,” barrons.com, Nov. 13, 2015.