First things first: Mark Zuckerberg, please take more paternity leave. One third of this remarkable quarter from Action Alerts PLUS charity portfolio holding Facebook (FB) came during your first month off with your family's new addition.
OK, all kidding aside, the move up in Facebook's stock this morning makes a ton of sense, given that this quarter may be the single best quarter anyone has ever seen. It ticked off every box that stock buyers want to see:
- Accelerating revenue growth as quarterly revenues increased 52% and 60% on a constant currency basis, a speed-up from the 44% jump or 53% constant currency for the full year. That's so fast that who even cares about the strong dollar impact on this amazing growth company?
- Fed, hold your ears: the company had no economic sensitivity whatsoever, CFO David Wehner saying "we didn't see anything in Q4 that indicated broad-based macro weakness beyond foreign exchange."
- Unlike virtually every single internet company, Facebook can charge more for mobile ads than desktop, which is how more than 80% of its more than 148 million people use Facebook daily, because it has what Zuckerberg said is a "better, more engaging experience."
- Yet despite the 100 million hours of video watched daily, Sandberg points out the advertisers have yet to catch up with consumer adoption, even as 2.5 companies advertise on Facebook. Sandberg says Facebook is under-indexed as an ad medium, despite its tremendous return for investors, including a 20x return for Shop Direct, the U.K.'s second largest on-line retailer, and an amazing uplift for Halo 5, from Microsoft (MSFT), a far better medium for video game introduction than any other. "We want to be the best dollar, best ever euro, the best ever pound and the best minute you spend," Zuckerberg says they tell advertisers, and there is no doubt he means it.
- This company doesn't have to buy back stock or increase the dividend, because unlike virtually every company I have seen in these slow growth days, the spend gives the company an instant return, which is why you don't have to be wary of the increased expenses, you want them to accelerate. It is going to spend two times what it currently does on Instagram, What's App and messenger, the latter two not even being monetized, even as Instagram ads out of nowhere are becoming a major stream of revenue. It is going to spend three times on Artificial intelligence and virtual reality, because it expects the returns there to be even more massive.
- It's entirely possible that Messenger, with its 800 million users, which just grew by 250 million people and What's App, the much ridiculed $19 billion purchase, could be as big as Facebook and Instagram, and Zuckerberg's so confident that he waived the fees for the latter. The monetization stages will be like the Instagram, the mostly maligned $1 billion purchase, once they build a better consumer experience that Zuckerberg says "helps share in a new way that's really important."
- The $2 billion Oculus Rift acquisition from less than two years ago is about to explode in a big way, as it is targeting the 250 million Xbox, Playstation and Wii users. Although the company will be supply constrained for the various devices, you are going to see a significant revenue stream from this division in the very near term. It will be hard to see how bricks and mortar advertisers can pass it up, either, especially as it, along with all of the other mediums, dovetails well with television.
How did this all happen? How did Facebook, which initially seemed so mobile-unfriendly, become such a powerhouse for users and therefore advertisers? Simple, Zuckerberg says "I told all of our product teams when they come in for reviews really just come in with mobile. If you come in and try to show me desktop product I am going to kick you out and you have to come in and show me a mobile product." He said what he called this "crude leadership tactic" allowed Facebook to develop a great consumer experience, something that is actually enhanced by advertising based on science and art.
All of these changes have created a stock that has gone from relatively expensive at $94 to somewhat cheap at $110, because it now seems that $5.50 could be in the cards for 2018, the length of time you should look at when creating a price to earnings multiple. Who wouldn't pay 20x earnings for this monster?
And that's how you get to the best news story of the year, frankly, if not the decade. Facebook could, like Netflix (NFLX), change the way we view entertainment, or Google (GOOGL) change the way we research, or Growth Seeker portfolio holding Amazon.com (AMZN) change the way we buy, which is why it is now the cheapest of the high-growth FANG.