FB stock, after shaking off a six-month slumber, broke out into a buy zone and record highs this week, amid optimism over Facebook (FB) advertising and a strong start to its e-commerce Shops push.
The spark came on March 19, when Facebook CEO Mark Zuckerberg gave a rousing update on the social media giant’s big e-commerce push. He also suggested that a new privacy measure from Apple (AAPL), which is among investors’ biggest worries, could actually be a blessing in disguise for Facebook.
FB stock and other big tech growth stocks whose earnings surged amid the pandemic took a back seat as vaccines and massive fiscal stimulus began to rev up the rest of the economy. Now big tech is suddenly back in vogue, or at least no longer out of favor. Facebook’s resurgence makes that official.
Facebook blew away Q4 earnings estimates on Jan. 27, posting its fastest revenue growth in more than two years. But FB stock suffered a nasty reversal the next day, despite a flurry of price-target hikes to as high as 360.
Investors appeared to focus on CFO Dave Wehner’s prediction of “high opt-out rates” from allowing Facebook to track users’ activity across third-party sites. Opt-outs mean Facebook will know less about users’ interests, life changes and purchases. The worry has been that if Facebook has a harder time connecting advertisers with likely customers, ad pricing could suffer.
Yet Zuckerberg expressed confidence that Facebook will “manage through that situation well.” He added, “we may even be in a stronger position if Apple’s changes encourage more businesses to conduct commerce on our platforms.”
Another big Facebook problem — antitrust lawsuits — also might produce upside for FB stock, analysts’ sum-of-the-parts valuations suggest. Meanwhile, e-commerce efforts are surging. So is now a good time to buy FB stock?
Facebook Shops Takes Off
On the PressClub podcast on March 19, Zuckerberg announced that Facebook Shops, first announced last May, has more than 1 million active shops in its digital mall and 250 million shoppers, or at least browsers, per month.
Shops is Facebook’s big effort to bring e-commerce purchases in-house, instead of just facilitating user-advertiser connections that result in off-site purchases. Businesses can set up a single shop for customers to access on both Facebook and Instagram.
Morgan Stanley analyst Brian Nowak said in a research note that the scale Shops has achieved in just 10 months “should give investors more confidence in the durability of FB’s multiyear growth.”
Nowak said Morgan Stanley’s AlphaWise survey had previously suggested that about 30% of Americans are shopping on Facebook’s Instagram site per month. Morgan Stanley has estimated $1.9 billion in annual revenue tied to Instagram Shops. Zuckerberg’s disclosure “implies that the global contribution from Shops this/next year is likely to be larger than our ~$1.9bn annual estimate,” Nowak wrote.
Facebook has warned that ongoing privacy regulation and changes in mobile operating platforms could impede ad targeting and weigh on ad pricing.
Apple’s spring update for Apple’s iOS 14 will require Facebook and other apps downloaded through the App Store to provide users a prompt, allowing them to opt in or out of tracking their activity across third-party sites. Google plans to eliminate third-party cookies to track user activity from its Chrome browser in 2022.
“It doesn’t do a local wedding planner any good to reach people who aren’t planning a wedding,” wrote Dan Levy, Facebook vice president of ads and business products, on Dec. 16.
Small businesses could see a cut of over 60% of website sales from ads without ad-targeting, Facebook has estimated. Ahead of the Q4 report, Evercore ISI analyst Kevin Rippey wrote that analysts saw as much as a 10% revenue hit in the worst case, though he thought that the drag would be much smaller.
The success of Facebook Shops limits the downside of Apple’s privacy change, Morgan Stanley’s Nowak said. Bringing “the merchant transaction onto the platform removes the need for off-platform tracking,” he wrote.
Zuckerberg suggested that Apple’s changes could “encourage more businesses to conduct commerce on our platforms” to make the most of their internal data for advertising purposes.
Still, to the extent Facebook’s advertising prowess depends more on activity within Facebook and Instagram, the implications of a breakup become bigger.
FB Stock Analysis
After hitting a record high of 304.67 on Aug. 26, FB stock’s momentum flagged as investors looked ahead to vaccines and an eventual return to normal. Subsequent rally attempts in November and January both sputtered.
First, a postelection rally carried FB stock back near old highs, cresting at 297.38 on Nov. 5, as Wall Street mistakenly celebrated the apparent continuation of gridlock in Washington. But news of the Pfizer vaccine’s stunning effectiveness on Nov. 9 quickly doused that rally.
Selling pressure intensified as news of antitrust lawsuits against Facebook hit on Dec. 9. Then Democrats took control of the Senate in two Jan. 5 runoff elections, reviving tax-hike and regulatory concerns. But investors went bargain-hunting in anticipation of a blowout Q4 earnings report on Jan. 27 — and they got it.
On Jan. 28, Facebook stock initially popped on earnings, rising as high as 286.79. But shares closed down 2.6% to 265, a nasty outside downside reversal day. That seemed to take the fight out of FB stock, which struggled to stay above its 200-day average in late February and early March.
The latest rally had a different feel. FB stock surged on Zuckerberg’s Shops talk, clearing the Jan. 28 high of 286.79 and an early entry point of 286.89.
After rising as high as 299.71 on March 22, FB stock pulled back to its 21-day moving average while creating a handle on the end of its long consolidation. That created an actionable buy point at 299.81, 10 cents above the top of handle.
FB stock dipped flirted with a breakout on Friday, then charged into a buy zone on Monday, rising 3.4% to 308.91. The buy zone runs through 314.80.
FB stock’s relative strength line, the blue line in the charts provided, came well off its August peak as the stock lagged the S&P 500’s performance. Yet after hitting bottom in mid-January, Facebook’s RS line has broken its downtrend, making successively higher highs.
Facebook earnings easily surpassed fourth-quarter estimates. The FANG stock earned $3.88 per share, up 52% from a year ago and 69 cents ahead of the consensus. Revenue surged 33% to $28.1 billion.
The accelerating revenue growth came despite a further dip in daily active users in the U.S. and Canada to 195 million, down from 198 million in Q2. Facebook had previously warned that a spike in use of the social media app that occurred early in the pandemic would moderate as life normalized.
The bigger picture is that Facebook advertisers, a group that has grown to more than 10 million businesses, are using the social media site to connect with prospective customers like never before.
Worldwide daily active users rose to 1.845 million on the Facebook platform vs. 1.82 million the prior quarter, led by growth in the Asia-Pacific region. Across all platforms, daily active users hit 2.6 billion.
Q4’s growth came as ad impressions served across Facebook properties grew at a slower 25% pace vs. a year ago. However, the average price per ad rose 5%, after falling 9% in Q3.
Wall Street Analysts Shrug Over Facebook Antitrust Suits
On Dec. 9, the Federal Trade Commission and a group of state attorneys general filed separate antitrust cases alleging that Facebook’s acquisitions of Instagram and WhatsApp were anticompetitive in nature and intended to bolster its monopoly position.
The FTC wants Facebook broken up to create the same level of competition that would have existed without the Instagram and WhatsApp mergers.
Facebook general counsel Jennifer Newstead wrote in a statement that regulators let its 2012 Instagram and 2014 WhatsApp deals move forward “because they did not threaten competition.” She argues that the mergers were “procompetitive.” For example, Facebook turned WhatsApp from a subscription service into a free service, challenging telecom operators’ text-messaging fee structure.
So far analysts are largely dismissing the possibility of a breakup.
“We continue to believe the likelihood of a breakup of FB is low (judges are typically loathe to undo transactions) and the sum of parts of the various segments is likely similar or greater than FB current valuation,” Raymond James analyst Aaron Kessler wrote in a December note.
Could analysts be wrong about the outcome? The challenge for the government plaintiffs will be to prove that the mergers didn’t only reduce competition, but that they were actually harmful. Antitrust lawyers will try to prove their case by showing reduced privacy for users, higher prices for advertisers, and unfair competition against smaller competitors. Facebook reportedly tried to avert an antitrust suit by offering to license access to its code as a way of enabling new competition, but regulators weren’t swayed.
Will Facebook Face Backlash For Silencing Trump?
Facebook suspended President Trump’s account indefinitely after his supporters overran the Capitol to disrupt certification of Joe Biden’s victory. Early on Jan. 7, CEO Mark Zuckerburg wrote that Trump had chosen “to condone rather than condemn the actions of his supporters.” Subsequently, Facebook blocked all “stop the steal” content.
Bank of America analyst Justin Post wrote on Jan. 11 that Facebook had 33 million Trump followers, raising the possibility of some customer churn and “engagement risk” in Q1. He also expects legislation to be proposed that would require higher spending to review user content.
Still, Post said he saw higher risk for Twitter than Facebook and maintained buy ratings for both stocks.
Facebook’s Diem Dollar
Facebook’s entry into the cryptocurrency space, first announced in mid-2019, looked all but dead after Fed Chair Jerome Powell and international regulators raised serious doubts about the plan. Yet the company quietly moved forward with an approach considered somewhat less controversial. On Dec. 1, the Libra Association behind Facebook’s cryptocurrency renamed itself the Diem Association to go with the renamed Diem Dollar cryptocurrency. Instead of its original plan for a stablecoin with a value pegged to a basket of currencies, Facebook now plans a coin pegged only to the dollar. The company hopes that change, along with a new focus on anti-money laundering, will meet the demands of regulators.
Facebook still needs some state approvals for its Novi digital wallet. Additionally, the Diem cryptocurrency plan needs approval from Switzerland’s Financial Market Supervisory Authority. That’s where the Diem Association is based.
Yet just as Facebook revived its cryptocurrency plan, a group of House Democrats introduced the Stable Act. The bill would require stablecoin issuers such as Facebook to get a banking charter. It also would provide for a six-month review by the Fed and FDIC before issuance.
How Much Is FB Stock Worth?
FB Stock: Is It A Buy?
Facebook proved its mettle during an unprecedented economic downturn, and Wall Street analysts think this FANG stock still has a long growth runway.
Facebook stock boasts a strong 94 IBD Composite Rating. The Composite Rating combines several key fundamental and technical factors into a single score. IBD research shows all-time stock winners often have a Composite Rating of at least 95 near the start of big runs.
It’s dangerous to bet against FB stock, even as it faces a long antitrust battle and regulatory threats. Growth stocks could continue to face headwinds from rising interest rates. Yet Facebook has showed impressive agility with its well-timed e-commerce push. Now FB stock has shown the resilience to reach a proper entry point.
Bottom line: FB stock is a buy. Investors can “like” this FANG stock again.
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