Facebook (FB) is a new buy for Northlake clients. The social networking giant operates its original namesake product, as well as other widely used and fast-growing services including Instagram, Messenger, and WhatsApp. The company’s most recent quarterly results demonstrate strong user engagement and strong ad sales trends. This momentum is largely due to FB’s successful transition from desktops to smartphones as the key platform for its users. The company is also benefitting from a rapid change in the advertising industry, where ad dollars are shifting from traditional print and TV ads to digital ads. FB continues to strategically and significantly invest in its business to drive long-term growth. The cost of this investment has been a headwind but recently issued guidance for 2016 suggests management is being careful with its spending.

Aside from strong momentum on the original Facebook service, we believe that Instagram will grow to become a meaningful contributor in 2016. According to management, 98 of the top 100 advertisers on Facebook are also advertising on Instagram. This will likely be a strong growth driver in the near term. Other near term growth will come from improved measurement of the impact FB digital ads have on consumers, allowing advertisers to better understand the real value of ads on FB’s services.

Looking longer term, FB is developing Messenger and WhatsApp. Each of these services has great potential for future monetization, but FB management has chosen to focus first on driving user growth and improving the user experience. This is consistent with the way FB developed and monetized Facebook and Instagram.

FB management is also investing in virtual reality, which they believe could eventually be the next big platform in computing. The first version of the Facebook-owned Oculus Rift virtual reality headset will ship in July 2016, but management has cautioned that adoption of virtual reality will likely be slow. However, there is potential for VR to be another large growth opportunity longer term.

Facebook faces the same risks as many global companies today, including unfavorable foreign exchange rates impacting revenues and earnings and other macroeconomic uncertainties. However, we believe that FB is extremely well managed and well positioned for explosive growth.  The shares could easily reach $140 later this year as investors look ahead to over $4.00 in earnings in 2017, another year of over 30% growth in earnings.