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Facebook is one of the world’s most valuable and controversial companies. Some use it to share pictures of their dogs, and others use it to manipulate elections.
But is Facebook stock a buy? Let’s find out in this Facebook Stock Analysis and Forecast.
What is Facebook?
In 2004, Mark Zuckerberg and his roommates started Facebook in their Havard dorm room.
Seventeen years later, its market cap is just shy of a trillion dollars.
Facebook is a member of the FAAMG stocks family, which refers to the distinguished high-growth technology companies that lead the market: Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) parent Alphabet.
Facebook monetizes its nearly 3+ billion users across its main platform, Instagram, and WhatsApp by selling advertisements to marketers.
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Facebook Bull Cases
#1. Digital Advertising
Companies looking to advertise online pretty much have two options: Facebook and Google.
Facebook and Google are the best digital advertisers because they control the world’s data.
Facebook’s access to data allows it to advertise better by delivering personalized ads, which increases engagement with the product or service it’s promoting, resulting in more profits for Facebook.
Facebook algorithms create advertising profiles based on user behavior – the more time users spend on Facebook platforms (or platforms that share data with Facebook), the more accurate the advertising profiles become.
Optimizing ads is the key component to the business; Facebook recorded $84.2 billion in advertising revenue in FY 2020, which accounted for 98% of its total revenue.
Facebook expects a massive uptick in revenue for 2021 as the economy reopens and businesses resume their advertising campaigns.
#2. Instagram Financials
Facebook does not disclose Instagram’s financial data, following in the footsteps of Amazon and Google, who chose to keep AWS and YouTube numbers private for many years.
When Amazon revealed AWS’s financial data in 2015, shares surged 59% in the next year while the S&P 500 was down 1%.
This past year, Google decided it was time to pull back the curtain on YouTube. Google shares have jumped 40% since doing so, compared to 24% for the S&P 500.
So, will the “Instagram Reveal” send FB shares soaring? Estimates from Baird analyst Colin Sebastian suggest it will.
He estimates that Instagram accounts for ~30% of Facebook sales, which would total $25 billion last year. Its revenue has grown at an 80% annual rate since 2017.
Max Cherney of Barron’s Magazine believes this is a crucial ingredient that investors have not priced into the stock yet.
Facebook is jumping on the shift from offline to online commerce to diversify its revenue streams beyond advertising.
In just one year after launching, Facebook has more than a million active shops that 250+ million people interact with each month.
Deutsche Bank estimates that Facebook and Instagram Shops could add up to $12 billion in sales by 2023.
This is the perfect example of Facebook identifying trends and capitalizing on them by adding features to its platforms, which almost certainly have more users than its competition.
#4. Virtual Reality and the Next Leap in Computing
Mark Zuckerberg believes that virtual reality (VR) and augmented reality (AR) is the next generational leap in computing – just like the change from PCs to mobile devices.
If he’s right, Facebook could evolve into an entirely different company.
In 2014, Facebook acquired Oculus VR for $2.2 billion, which began Facebook’s journey to becoming more than an app.
The company has built its own operating system through Oculus, allowing Facebook to completely redesign the way humans interact with apps.
Zuckerberg has expressed his frustrations with the way current operating systems restrict functionality and work opposite of human nature.
Facebook is taking its time to execute on these plans, but it’s made significant progress thus far.
The $299 cordless Quest 2 is looking to become the first mainstream VR headset, and the company has partnered with the maker of Oakley and Ray-Ban to launch its first AR product later this year.
Facebook began merging the physical and digital worlds back in 2004 — who is more fitting to blend them entirely and build the virtual worlds of the future?
#5. Spinoff Potential
Some fear that Facebook’s investment potential is limited by regulatory scrutiny, but others argue the exact opposite: breaking up Facebook could unlock value for FB shareholders.
Spinning off Instagram and WhatApps into their own companies is an opportunity for enormous value creation. Existing Facebook investors would be rewarded just like eBay shareholders were in the PayPal spinoff.
However, breaking up Facebook is unlikely, and the company has strived to make it untenable by weaving threads between Facebook, Instagram, and WhatsApp.
Unifying them both technically and financially hurts regulators’ case to break them up because it would be too detrimental to the main platform.
It’s important to distinguish the kinds of regulation Facebook might face. The impacts of antitrust allegations and changes to Section 230 are fundamentally different.
Facebook’s strategy is to grow a massive user base for a specific product and then turn on the advertising switch.
What other company can launch a new product, feature, or service and instantly get it in front of 3 billion people?
It has done this with messaging and commerce, for example, and will execute on VR, AR, and wearables next.
Plus, the company has no shame in copying the competition – it can just add the new, desirable feature from “disruptors” to its existing Facebook or Instagram platforms. For example:
- Videos on Instagram from Vine
- Instagram Stories from Snapchat Stories
- Instagram Reels from TikTok
- Video Conferencing from Zoom
- Facebook & IG Shops from Shopify
- Live audio from Clubhouse
Facebook’s ability to deploy any offering allows it to pivot into the “next big thing” seamlessly.
Bonus Moat: The Facebook Phenomenon
Facebook’s advantage is that its flagship offering is user-generated content, which is “free” from a monetary perspective.
The users create the product while simultaneously being the product.
This phenomenon results in less friction when it comes to customer acquisition.
Most people are willing to sacrifice their privacy or data if they believe they’re receiving something of great value in exchange.
However, few realize the value of one’s data, except for Facebook, which raked in $86 billion last year.
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FB Stock Analysis
Facebook reported Q4’20 earnings on January 27, 2021 — here are the highlights:
- Earnings: $3.88 per share vs $3.22 per share forecast
- Revenue: $28.07 billion vs $26.44 billion forecast
- Daily active users: 1.84 billion vs 1.83 billion forecast
- Monthly active users: 2.8 billion vs 2.76 billion forecast
- Average revenue per user: $10.14 vs $9.49 forecast
Zuckerberg addressed several topics on the earnings call, from the company considering steps to reduce the amount of political content on Facebook to the impacts of Apple’s privacy changes in iOS 14.
Facebook revealed that it has 3.30 billion total monthly users across its family of apps, including the main Facebook platform, Instagram, Messenger, and WhatsApp.
While Facebook’s “Other” revenue accounted for just 3% of total revenue in the quarter, it increased 156% YoY to $885 million.
This jump was driven by strong holiday sales of Oculus Quest 2 VR headsets and the Portal video-chatting devices.
Investors reacted positively to the call, and the stock was up in after-hours trading.
Facebook Bear Case
Facebook has received the most fines in Silicon Valley’s history – in 2019, it was fined $5 billion for violating privacy and security laws, which was one of the largest penalties ever assessed by the U.S. government for any violation.
For most, Mark Zuckerberg is the first to come to mind when hearing “Big Tech” and “regulation” or “censorship”.
Ironically, the features that make Facebook an effective platform are the same aspects that make people call for regulation.
This is the result of unintended consequences from innovation, like live video streaming and frictionless sharing of information that may or may not be accurate.
Remember, there are thousands of Facebook employees whose only job is to make you keep scrolling.
More often than not, the most engaging content is controversial and negative, which the algorithm spreads because it means more screen time (which means more advertisers).
This has gotten Facebook into hot water – politicians on both sides of the aisle want to change or repeal Section 230, which is a law that provides liability protection for websites and platforms (like Facebook) that host user-generated content and allows sites to monitor that content.
Changes to Section 230 would be detrimental to Facebook’s business model; if Facebook is responsible for its platform’s content, it may be less inclined to share the most engaging content.
While this may be positive for the users’ long-term health, the updated user experience will suffer in the short term as the algorithm delivers less hits of dopamine.
Users might consider spending more time on other platforms, and the advertising dollars will follow them.
Facebook Top Competitors
Big Tech relationships are complex – they’re pals in one market and enemies in another.
These companies closely monitor each other. If you see a new product launch from one, expect the others to follow shortly. Here are Facebook’s top competitors by market:
- Google (GOOG)
- Amazon (AMZN)
- Apple (AAPL)
- Microsoft (MSFT)
- Snapchat (SNAP)
- Twitter (TWTR)
- YouTube (GOOG)
- LinkedIn (MSFT)
- Pinterest (PINS)
- Shopify (SHOP)
- Amazon (AMZN)
- Alibaba (BABA)
- JD.com (JD)
- MercadoLibre (MELI)
- WeChat (TCEHY)
- Apple (AAPL)
VR and AR
- Sony (SNE)
- Microsoft (MSFT)
- Alphabet (GOOG)
- Apple (AAPL)
- Qualcomm (QCOM)
- Nvidia (NVDA)
- Snap (SNAP)
- Google (GOOG)
- Apple (AAPL)
- News Corp (NWSA)
- New York Times (NYT)
- Washington Post
- Microsoft (MSFT)
- Salesforce (CRM)
- Zoom (ZM)
- Siri (AAPL)
- Google Home (GOOG)
Today’s digital economy is driven by attention, so Facebook competes with any company that harvests an individual’s attention, such as Netflix and Peloton.
While Facebook has no shortage of competition amongst Fortune 500 companies, regulation from DC (and beyond) is its only real threat.
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FB Stock Allocation in Your Portfolio
The right amount of Facebook stock in your portfolio depends on a variety of personal factors.
However, the following questions might help you measure your conviction in the investment potential of FB stock.
- Will changes to Section 230 be too destructive to FB’s business model?
- Can a new social platform replace Facebook, like it did to Myspace and Friendster?
- Will Facebook execute on VR and AR?
- Is there more upside in other FAAMG names or younger tech companies?
- Is the Invesco QQQ ETF a safer allocation to capture tech’s upside?
- Will the “Instagram Reveal” be similar to that of AWS and YouTube?
- Is Bitcoin up or down?
- Can Facebook successfully diversify revenue beyond advertising?
Additional Facebook Stock Analysis
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Facebook Stock FAQs
Will Facebook hit $1000 a share?
Facebook is currently trading at all-time highs around $311 per share.
While its advertising business prints dollars, we believe Facebook needs to capitalize on its ambitious projects, like VR, AR, and social commerce, to hit $1000 a share.
Why is Facebook stock dropping?
High-flying tech stocks like Facebook tend to drop when the 10-year bond yield rises.
However, Facebook stock and other FAAMG stocks have become relatively less expensive in recent months, despite hitting all-time highs.
Is it smart to buy Facebook stock?
Facebook is the second largest digital advertiser in the world, behind Google.
It is smart to buy Facebook stock if you believe the company can continue to offer engaging products and services to its user base of 3 billion people.
Will Facebook ever pay a dividend?
While it’s uncommon for tech companies to pay a dividend, Facebook is in a unique position to do so – the company is sitting on a pile of cash while walking on eggshells with regulators.
This makes them cautious when it comes to using that cash for acquisitions. Facebook would open itself up to a new wave of institutional investors if it were to pay a dividend. In the meantime, it will continue to do stock buybacks.
Facebook Fast Facts
#1. Largest IPO at the time
Facebook was set to go public in 2012 at a $104 billion valuation, making it the largest IPO to date in U.S. history.
The day before the IPO, Facebook announced it would sell 25% more shares to accommodate demand. The IPO raised $16 and was the third-largest in history, behind General Motors and Visa.
#2. Cameron and Tyler Winklevoss sued Mark Zuckerberg, claiming he stole their idea
The Winklevoss Twins claim that Mark Zuckerberg stole their idea for a social platform while students at Harvard. Zuckerberg settled with Cameron and Tyler for $65 million.
#3. The Social Network is considered one of the best movies from the 2010s
The Social Network is a 2010 biographical drama about the founding of Facebook. It was directed by David Fincher and written by Aaron Sorkin.
The Social Network won several awards and ranked second on Rolling Stone’s end-of-the-decade list, behind Moonlight.
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Bottom Line: Facebook Stock Forecast
Facebook stock has risen substantially since its IPO price of $38, but there’s still room for it to run.
Zuckerberg will continue to reinvent Facebook into more than a social media company. It’s the only FAAMG that doesn’t have trillion-dollar status, but that won’t last for much longer.