Future of Facebook Stock
In this article I am gonna share a complete analysis of Facebook stock, we will dive deep into recent quarter’s earnings and I will share a good entry point and a target price recommendation. We will also look into current headwinds Facebook is facing. So let’s get started.
Firstly to give you some background Facebook is not only the Facebook app, it also owns instagram, whatsApp, Oculus VR headset and workplace app. All. These apps together are called Facebook family. As of 31 Dec 2020 Facebook blue app alone had a total of 1.8 Billion daily active users and 2.8 Billion monthly active users. On the other hand if we look at facebook family as a whole means all the apps together then daily active users are 2.6 Billion and monthly active users are 3.3 Billion which is roughly half the population of the world. With such a high number of users it’s no surprise that growth is slowing down and will continue to be down in low single digit in years ahead. But Facebook has proved that new users are not the only way to grow, their main metric now is Average revenue per user which is $10.14 per user in 2020 compare to $8.52 in 2019.
On the last quarterly earnings call, CEO Zuckerberg outlined some of the work his company is doing to diversify the revenue which is currently mostly coming from Advertising. They are building a private social platform for more intimate interactions, e-commerce solution, WhatsApp payments, and a cloud computing platform. Also, there are new tools for small businesses and entrepreneurs to sell and accept payments online; the development of a next-gen AR/VR computing platform via Oculus that goes beyond delivering video games and entertainment, and Workplace which is a messaging tools for business employees to communicate with one another and customers.
Now let’s look at Q4 2020 results:
In Q4 2020, FB revenue grew to $28 Billion compare to $21 Billion in Q4 2019 which is 33% increase year over year, Most of their revenue is still coming from North America but as you can see, their revenue from Europe and Asia is constantly growing which is their biggest growth market in years ahead. In addition to advertising revenue it also had $855 Million on other revenue from Oculus and workplace and Portal devices, this segment saw 250% year over year growth. It had a total of $12.77 Bn in income compare to $8.8 Bn in 2019 which is 45% year over year increase. So Overall Facebook had a really good quarter and year in 2020. But question is will it be able to continue this strong performance in Future specially if users are declining and there are privacy concerns.
Let’s look into the headwinds that FB is facing
Facebook’s management warned of “significant uncertainty for its business”, primarily because of ad targeting headwinds tied to Apple’s rollout of iOS 14, its new mobile operating software. iOS 14 includes a number of changes designed to increase user privacy and control over their data. Apple is changing the way that it manages permissions so that when you go into an app, there’s going to be a pop-up that says “this app tracks your activity Do you want to allow that?” You have to actively say ‘Yes” in order to do that.
For Facebook, this change is introducing an unusual level of uncertainty in its business because millions of users who use iPhone are likely to click “ No” and they won’t allow Facebook to track their activities. This will limit their ability to target the customers with relevant ads. They have already warned its millions of advertisers repeatedly of the disruptions that iOS 14 is likely to cause.Many small businesses will no longer be able to reach their customers with targeted ads which is going to be another shock for small businesses who are already suffering from pandemic. So that’s a one big area that might impact Facebook’s business in 2021.
Another Area is that, most recently a lawsuit from the Federal Trade Commission (FTC) was filed against Facebook, alleging that it has routinely undertaken illegal anticompetitive activity, specially when acquired Instagram and WhatsApp. Though this lawsuit is still ongoing and may take several years to settle but in worst case it might impact force Facebook to sell off Instagram and WhatsApp.
Recommendation:
Currently Facebook is trading at roughly $268 a share, which is 26 times earnings, though it is very cheap give that it is still growing 20%-30% every year. But I would not recommend to buy Facebook stock at this point. I will wait for them to settle the issue with iOS 14 and see how it impacts their business, also in light of a lot if backlash arising from user privacy and data security concerns, I would not favour Facebook stock at this time. If it successfully navigates these challenges then may be towards the end of 2021 I can look at the stock again but at this time risk is simply too high, so I am not a buyer.