Facebook (Nasdaq: FB) has long been the leader in social media, dominating internet time use and an increasing share of online advertising spending.

As of June 2017, the platform counts more than two billion monthly users, including a full one billion who access the site daily. Users spend an average of 35 minutes a day on the platform and access it eight times a day according to Nielsen.

It’s been able to translate that social media dominance into a huge chunk of the advertising pie — and shares have soared. 

Since the post-IPO low of $17.73 per share, Facebook has jumped ten-fold, with a gain of 56% in this year alone.

#-ad_banner-#But the platform has always hit one stumbling block, one weakness where it has lost visitors and limited its revenue potential.

It may be about to launch a program that solves that problem, a solution that could improve the user experience, keep people on the platform longer and create another revenue stream.

The program could take Facebook from social media control to overall media dominance.

Facebook Looks To Become A True Media Power
Time spent by users on the Facebook is actually down from 50 minutes recorded by the company last year. At the time, it was the most of any leisure activity except watching television according to the BLS. 

Despite the platform’s control of your social life, you most likely still have to go off-site for news. Unless someone shares a news story, it’s difficult staying up to date by just following messages in your feed. 

Facebook has never been particularly good for this kind of information need. In fact, the platform has come under pressure because the lack of legitimate news has made it easier for scam stories to influence users.

Legitimate news sources have had little incentive to share stories on Facebook. They receive no compensation and Facebook keeps all ad revenue from the site. 

Until now. 

Facebook is working with The Washington Post, The Boston Globe and other publishers to test ways to have users subscribe to articles. News publishers will be able to generate revenue from user subscriptions and will get user data, which is valuable for tracking and marketing.

Facebook earns most of its revenue from advertising, and is also slowly building a new payment. While the new subscriber program promises to let publishers keep subscription fees, there are several ways Facebook could benefit significantly. First, the platform increases ad revenue substantially just by keeping users on the site longer. When a user clicks through a link on Facebook, it either opens in a new window or shows as a part of the platform. This means even when users click to read news articles, they are likely to come back to Facebook when done reading.

News publishers are likely to spend more ad dollars on the platform now that they can drive users to a subscription model. Facebook may also eventually decide that it wants a chunk of subscription revenue from the users it sends publishers.

How Much Is Facebook Worth?
Facebook may have exploded to a $522 billion behemoth but there’s still a lot of room for growth if it can conquer traditional media as it has the social sphere.

Marketing researcher eMarketer estimates paid media advertising will increase to $583.9 billion this year, of which $223.7 billion will be spent on digital media. Facebook is already a powerhouse in all this, but still has a lot of room to build off its $33.2 billion in annual revenue.

Earnings are expected to grow 19% to $5.77 over the next four quarters from $4.86 per share in the trailing quarter. Revenue is expected to grow 35% over the same period. 

Expectations for revenue growth open the door for a strong beat on earnings. The company’s operating profitability strengthened to 45% in 2016 from 36% three years ago. If Facebook can continue to improve profitability or even keep it from falling, expectations for revenue growth will translate to much higher earnings. 

Average revenue per user (ARPU) surged 34% last year to $15.98 from 2015 with a 49% increase in ARPU across the United States and Canada.

While the company doesn’t pay a dividend, it may not be far off. Facebook has $35.5 billion in balance sheet cash and no long-term debt. The sixth largest company in the world has no long-term debt and generates $14.3 billion a year in free cash flow.

The average 12-month price target among 28 analysts is for $200.77 per share, which would represent a multiple of 34.8 times expected earnings. Given the company’s history of beating estimates, with an average beat of 12.4% over the last eight quarters, I’m looking for earnings of $6.46 over the next year.

Shares have traded at an average multiple of 36 times trailing earnings since the IPO, bringing my target to $232 per share, or a gain of 29% on the current trade.

Beyond the potential in revenue expansion from the news subscription program, Facebook has yet to fully monetize its WhatsApp and Messenger apps. These are two of the most popular apps in Google Play and the iOS Store, with the potential to add billions to top-line growth.

Risks To Consider: Shares of Facebook have run with the rest of tech this year and could face a short-term selloff if investor sentiment drops. 

Action To Take: Position in Facebook as it builds on its social media dominance to become an all-around platform for news and daily information.

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