This Facebook stock forecast article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary

• Bloomberg reported last week that Instagram generated around $20 billion in advertising revenue in 2019.
• Facebook’s total FY 2019 ad revenue was $69.66 billion. Instagram is now, therefore, contributing 28.71% to Facebook’s annual ad revenue.
• Statista estimated that Instagram’s Q4 2019 revenue was $6.8 billion. This is 4x higher than Q4 2017’s $1.5 billion.
• Instagram’s fast-growing revenue stream is why I have a 90-day price target of $240 for Facebook’s stock.
• FB deserves a higher valuation. Global digital ad spending is still growing at more than 17% CAGR.

Facebook (FB) only paid $1 billion to acquire Instagram in 2012. Bloomberg reported last week that Instagram made $20 billion in advertising revenue last year. Instagram is now, therefore, contributing more than 28% of Facebook’s annual ad revenue of $69.66 billion.  More importantly, Statista’s chart below reveals Instagram’s Q4 2019 estimated revenue was $6.8 billion.

Instagram’s Q4 2017’s revenue was only $1.5 billion. Instagram’s 400% growth in quarterly revenue (or 82.57 CAGR) for the past two years is why FB deserves a 1-year price target of $240.  My fearless forecast is that Instagram will probably wrap up FY 2020 with $28 billion in annual revenue.

I recommend that you should go long on FB while it still trades below $210. Instagram is killing it in advertising. The consensus FY 2020 revenue for Facebook is $85.64 billion. However, Instagram fulfilling my $28 billion forecast should help Facebook make $87 billion this year. Greater revenue from Instagram can also help FB end 2020 with $10 EPS. Using a Forward non-GAAP P/E ratio of 24x, FB should trade at $240 pretty soon. It pains me to see that investors only give FB a current Forward Non-GAAP P/E valuation of 23.08x.

Facebook Is Undervalued

Instagram’s annual ad revenue is 11x greater than that of Snap’s (SNAP) 2019 revenue of $1.72 billion. Snap already touts 218 million daily active users. Despite its huge audience, Snap cannot even achieve $2 billion in annual revenue. Snap persists as a money-losing firm. Facebook continues to pile on the profits.

It is a, therefore, a big mistake for the stock market to give FB a 23.08x Forward Non-GAAP P/E valuation while giving SNAP 1,291.27x. Instagram makes FB a smarter investment than SNAP or Alphabet (GOOG).  I urge people to sell SNAP and use the money instead to buy more FB shares.

Like how it was in 2018/2019, I expect SNAP’s 2020 net loss to more than $1 billion. On the other hand, I expect FB to wrap up 2020 with a net income of $20 to $22 billion. This is based on my $87 billion revenue estimate for FY 2020.

Digital spending is still growing at more than 17% CAGR. Digital advertising leader Alphabet still has no equalizer to Instagram. My fearless forecast is that Instagram will help Facebook increase its market share.  Industry watcher eMarketer estimated that Facebook’s 2019 market share was 20.21%, and Google 31%. I believe Instagram can help Facebook take 23%  of this year’s estimated $385 billion global digital ad spending.

Why Instagram Is So Successful

The rapid growth of Instagram’s advertising revenue is due to its huge active audience and Facebook’s expertise in targeted ads. Hootsuite argued that marketers/advertisers prioritize Instagram for their ad placements because 500 million people use it every day. Instagram offers businesses/brand marketers an easy way to engage daily with their customers.   

Instagram users also spend an average of 28 minutes every day on the platform. Instagram’s stickiness with its daily active users makes it perfect for targeted ads. Instagram also allows businesses to use the platform to sell their products directly. The e-commerce feature of Instagram is why 200 million users visit at least one business profile every day.

Conclusion – Facebook Stock Forecast

Ignore the news that the U.S. Federal Trade Commission ordered Facebook and other firms to submit details of their past M&A deals. This has no bearing on Facebook’s long-term prosperity. What is more important is that  Instagram is now Facebook’s most important growth driver.  Instagram’s success is why I don’t even mind that Facebook is still not placing advertisements on WhatsApp.

Five years from now, Instagram would probably account for 40% of Facebook’s annual revenue. Five years from now, Instagram will likely be generating $40 billion in annual advertising revenue and $10 billion in commissions on e-commerce sales and money transfer fees.

Aside from its current undervaluation, Facebook also touts a very strong balance sheet. FB has zero long-term debt and more than $54 billion in total cash. This super liquidity is another strong reason why FB deserves a 90-day price target of $240. Facebook can afford to buy more companies to expand its advertising reach and/or diversify its business.

A check on TipRanks also told me that 34 Wall Street analysts have an average 1-year PT of $251.25 for FB. They share my continued optimism over Facebook.

The stock-picking AI of I Know First also shares my confidence over FB’s future performance. I Know First gave FB a super bullish market trend score of 438.18. I Know First has a good 0.64 predictability score on correctly predicting FB’s one-year market trend. One year from now, Facebook stocks will likely trade at above $240 price point.

Past Success With Facebook Stock Forecast

I Know First has been bullish on FB stock price in a past forecast. On January 29, 2019, the I Know First algorithm issued a bullish forecast for FB stock. The algorithm successfully forecasted the movement of Facebook’s shares. One year after, Facebook’s shares have risen by 51.37% in line with the I Know First algorithm’s forecast. See the chart below.

This bullish Facebook stock forecast was sent to the current I Know First subscribers on January 29, 2019.

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Please note-for trading decisions use the most recent forecast.