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I’ve long said that Instagram Reels is going to be a huge upward catalyst for Facebook (NASDAQ:FB). A little over two weeks after Facebook stock launched Reels globally, I’m doubling down. Instagram Reels will be a big reason why FB stock drives toward $300-plus prices over the next six to 12 months.
Source: Wachiwit / Shutterstock.com
Reels is tracking in the right direction toward ubiquitous adoption and eventual dominance over TikTok in the fast video social category.
So buy Facebook stock today. Here’s a deeper look.
TikTok Copies First, Original Content Next
If you use both Instagram Reels and TikTok, your first impression of the content on Reels may be that it’s mostly just a feed of re-posted TikTok videos.
That’s exactly right.
And there’s nothing wrong with that.
If you recall, Instagram Stories started off by simply being a feed of re-posted Snap (NYSE:SNAP) Stories. Then, all those people that were double posting on Snapchat and Instagram realized they got tons more views and engagement on Instagram (thanks to the platform’s unmatched distribution). So they started creating just Instagram Stories.
Same thing will happen with Instagram Reels.
Right now, everyone is just re-posting TikTok videos on Instagram. But top content creators will see that their Reels are getting more views and engagement than their TikTok videos (again, because of Instagram’s unparalleled distribution). So they’ll ditch TikTok for Instagram Reels.
Of course, TikTok does retain some distinct advantages over Reels, namely the fact that the app removes the paradox of choice by creating a feed wherein content finds you (and not the other way around). But Instagram can – and will – tinker with the Reels algorithm to be highly similar. And, as time goes on, the differences between Reels and TikTok will get blurred.
To the point where the only things that truly differentiate them will be scale and distribution – two things which Instagram wins on, every time, versus every app, not just TikTok.
Thus, over the next several quarters, uptake of Instagram Reels will be significant, and that will show up in a big way on Facebook’s financials – and ultimately help drive FB stock higher.
Big Growth Acceleration
Instagram Stories powered a huge growth acceleration at Facebook back in 2016/17.
Specifically, following the launch of Stories in late 2016, Facebook saw an immediate and significant uptick in user growth, and a lagged and significant uptick in revenue growth (because ad dollars follow eyeballs). That led to Facebook reporting an impressive stretch of double-beat quarters, which helped power Farebook stock to huge gains over several months. (The rally would’ve lasted for a lot longer had it not been for the Cambridge Analytica scandal in early 2018).
Instagram Reels will power a similar growth acceleration at Facebook in 2020/21.
User growth will accelerate in the back-half of 2020 and into 2021 as Reels steals TikTok’s thunder and increases Instagram usage. Ad revenue growth rates will accelerate throughout 2021, boosted by a rebound in ad spending as the novel coronavirus pandemic eases. Margins will improve, especially since Facebook appears positioned to save money by permanently adopting work-from-home policies.
Facebook will report double-beat quarter after double-beat quarter throughout 2021. And FB shares will soar. How high? Above $300.
My modeling suggests Facebook is on track to do at least $20 in earnings per share by 2025. Based on a 20-times forward earnings multiple and an 8.5% annual discount rate, that implies a 2021 price target for Facebook stock of nearly $315.
Bottom Line on Facebook Stock
Facebook is a long-term winner trading at a discounted valuation. It has a huge growth catalyst (Instagram Reels) on the horizon.
If that’s not a winning recipe, then I don’t know what is.
Stick with the rally in Facebook stock. Buy on dips.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango was long FB and SNAP.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.