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FB stock has reestablished its FANG stock credentials this year as Facebook (FB) has proved all the doubters wrong. Second-quarter Facebook earnings blew away Wall Street estimates. Sales grew 11% from a year ago, despite coronavirus lockdowns that sent the global economy reeling. Even the added pressure of a high-profile ad boycott in July couldn’t keep Facebook ad revenue from growing 10% early in Q3.
Now FB stock has another worry to overcome. CEO Jeff Zuckerberg gave his deposition in the Federal Trade Commission antitrust probe of the social media giant last month. Now the FTC is reportedly preparing to file an antitrust lawsuit against Facebook. No final decision has been made, but Facebook stock fell in Wednesday trading.
Yet Facebook still has plenty of positive catalysts, as it ramps up its e-commerce push and takes on TikTok. So is it still a good time to buy FB stock?
FTC Antitrust Suit Coming?
The Wall Street Journal report that the FTC is preparing to file suit, pending a final decision, is no great surprise. Buzz about a Facebook antitrust suit has built up for weeks.
The FTC previously signaled it would scrutinize big mergers it had previously rubber-stamped, such as the Instagram and WhatsApp deals. On Feb. 11, the FTC ordered Facebook and other big techs to submit documents related to small acquisitions from 2010 through 2019. The FTC wanted to determine whether small deals that escape antitrust reviews have harmed competition.
If the FTC probe turns into an antitrust case, it could take years to litigate. However, there might be a nearer-term risk for Facebook stock. The FTC could seek to enjoin Facebook from completing the integration of its Messenger, WhatsApp and Instagram properties.
Announced in March 2019, the integration would let users of one site communicate privately with those on all Facebook platforms. Facebook Pay, launched last November to simplify and unify payment processing across Facebook and Messenger, will eventually loop in Instagram and WhatsApp. Yet integration could make it technically difficult for regulators to break up Facebook, splitting off WhatsApp and Instagram.
Numerous state attorneys general have announced an antitrust probe of Facebook. Meanwhile, the European Union is reportedly looking into allegations that Facebook has wielded user data, rewarding partners but cutting off access to competitors.
Facebook caught a break in July 2019, when the FTC approved a hefty, but manageable, $5 billion fine for its privacy abuses. That followed disclosures that Facebook let Cambridge Analytica, a Trump campaign contractor, access users’ personal data to target 2016 election messaging. The settlement relieved worry that the government would compel major changes in Facebook’s business practices. If the FTC now decides against an antitrust suit, FB stock could explode higher.
Facebook Takes On TikTok With Instagram Reels
Facebook still has plenty of untapped potential that has Wall Street excited. The company launched its new Shops social-media mall in May. Now it’s taking on TikTok with the newly launched Instagram Reels. And the long-term effort to monetize the massive WhatsApp user base is just getting started.
FB stock was IBD Stock Of The Day on Aug. 6, as Facebook shares continued their post-earnings rally. Facebook’s charge to record highs also seemed to get a push from the White House’s announced ban on TikTok.
Yet the Trump administration’s move against ByteDance, the Chinese operator of TikTok, may not help Facebook, as it tries to make waves in the short-form video sharing space. While the deal still needs approval, it now appears that Oracle will take a minority stake in TikTok and serve as its trusted technology partner to overcome U.S. suspicions.
On Aug. 27, Deutsche Bank analyst Lloyd Walmsley wrote that he saw Facebook Reels as a “nice defensive move” to keep Facebook users from shifting to TikTok. He added that the Reels format is well-suited to advertising.
Facebook Weathers Ad Boycott
More than 1,000 companies reportedly joined an ad boycott against Facebook launched by the NAACP and Anti-Defamation League on June 17 under the banner #StopHateforProfit. The boycott, targeting its handling of inflammatory speech and misinformation, followed Facebook’s acceptance of President Trump’s May 29 post about the shooting of looters during protests over George Floyd’s death. Coca-Cola (KO), Verizon (VZ), Unilever (UN) and Starbucks (SBUX) all joined the boycott.
While the boycott likely had some financial impact, Facebook said on its July 30 earnings call that year-over-year ad revenue growth held around 10% in early Q3, roughly in line with Q2’s trend.
Some people “wrongly assume that our business is dependent on a few large advertisers,” Facebook CEO Mark Zuckerburg said on the earnings call. “The biggest part of our business is serving small businesses. Our advertising is one of the most effective tools that small businesses have to find customers, to grow their businesses, and to create jobs.”
He noted that Facebook had more than 9 million active advertisers last quarter as more businesses shifted online amid the coronavirus pandemic.
FB Stock Analysis
FB stock fell modestly to about 267 in Wednesday’s stock market action on the FTC antitrust report.
Since peaking at 304.67 on Aug. 26, Facebook stock has fallen about 12%. But FB stock remains 19% above its pre-coronavirus high and 95% above its coronavirus crash low in March.
The most recent buying opportunity for Facebook stock proved to be a good one. Facebook gapped up on July 31 after posting strong Q2 earnings the prior afternoon. The opening minutes of the session saw FB stock mark a record high, establishing a gap-up buy point 10 cents higher.
The run over the next four weeks carried FB stock up 21% past the 252.37 buy point.
Now Facebook stock has a rare, ascending-base buy point of 304.77. An ascending base consists of a series of three pullbacks, each ranging from about 10% to 20% from the most recent high to low. Each of the pullbacks must mark a higher high and a higher low. Breakouts from an ascending base can lead to powerful gains.
Additionally, FB stock has found support at its 10-week moving average on Sept. 11 at 262.64. That represents another entry point, ahead of the ascending-base buy trigger.
However, a couple of points of caution are in order. First, the stock market uptrend is now under pressure, according to The Big Picture, IBD’s daily afternoon market-trend column. That amounts to a yellow light for stock purchases. Second, FB stock’s relative strength line, the blue line in the charts provided, has pulled back somewhat after hitting a record high in August. That indicates Facebook’s outperformance vs. the S&P 500 index has stalled.
Further, if the FTC does file an antitrust suit vs. Facebook, shares could have at least a knee-jerk reaction.
Facebook Earnings
Facebook earnings for the second quarter rose 98% to $1.80 per share, crushing estimates by 36 cents a share. The year-ago figure was depressed by recognition of $2 billion in legal costs tied to the $5 billion Federal Trade Commission settlement. Revenue grew 11% to $18.68 billion, sailing past estimates of $17.29 billion.
Before the coronavirus hit Q1 sales, revenue growth of 25% in Q4 had been the slowest growth rate in more than four years.
Advertising revenue grew 10% in Q2. Ad impressions surged 40% from a year ago, while ad pricing fell 21%.
Investors should look for companies delivering sustained earnings and revenue growth of at least 25%. Facebook earnings growth has doubled in the last two quarters, thanks to easier comparisons, while revenue growth is slowing.
In 2021, analysts currently expect Facebook earnings per share to jump 29% as the economy recovers post-Covid.
New e-commerce, Reels and WhatsApp monetization initiatives could drive growth. Facebook still has a long way to go in tapping its massive international user base. In Q2, the U.S. and Canada accounted for just 11% of Facebook’s 1.785 billion daily active users, but 50% of total revenue.
Yet Facebook said it expects continued revenue growth of around 10% in Q3. The company cited four reasons for caution, including macroeconomic uncertainty amid the coronavirus and potential pullback in fiscal stimulus. Management expects the recent surge in online engagement to normalize somewhat as offline activity picks up. The ad boycott will have some impact. Lastly, ongoing privacy regulation and changes in mobile operating platforms, notably the Apple iOS 14, could impede ad targeting and weigh on ad pricing.
Did Coronavirus Kill FB Stock Bear Case?
Facebook stock surged the day after management said on the April 29 first-quarter earnings call that advertising revenue had stabilized in April at a roughly flat year-over-year level. The guidance provided “huge upside” to the -5% to -10% trend Wall Street expected, noted Pivotal Research analyst Michael Levine. Levine, who had been among the biggest Facebook bears, promptly upgraded FB stock to hold from sell, hiking his price target to 225 from 167.
Flat revenue growth would have seemed unimaginably bad before Covid-19. Yet it was more than even bullish analysts could hope for in a period when coronavirus lockdowns had hit the brakes on consumer spending, grounded most air travel and cost tens of millions of jobs.
Pivotal’s Levine has since hiked his target to 275, keeping a hold rating. After Facebook offered Q3 guidance, he expressed uncertainty over whether management was simply being conservative or whether there might be “real speed bumps ahead.”
HSBC analyst Nicolas Cote-Colisson is among the last Facebook bears. He has a 195 FB stock target and a reduce rating. His case centers on regulatory risk, with Facebook facing potential exposure to antitrust action and privacy regulation.
How Facebook Weathered Covid-19
What explains Facebook’s resilience amid Covid-19 economic devastation?
Return on investment: “Marketers of all sizes have more limited budgets, so they need to make every dollar work as hard as possible,” COO Sheryl Sandberg said on the Q1 earnings call.
“That means measuring the value of their advertising is more important than ever,” she said. “For years we have made major investments in systems and tools that enable businesses to easily understand their return on investment. In the current environment, these investments are paying off.”
Shift from video advertising: Offline advertising dollars will increasingly shift to digital, JPMorgan analyst Doug Anmuth says. That could be a sizable tailwind, with the U.S. television ad market recently worth $70 billion and global TV market $200 billion. Still, some dollars shifting from TV to Facebook could shift back, as live TV sports and entertainment fare return.
Supply surge: While the coronavirus surge in usage focused on messaging, voice and video calls, more people also have used News Feed and Stories formats to communicate with friends and family. Increased engagement produced what CFO Dave Wehner has called a “supply-side shock,” serving up more ad impressions.
Flexible auction model: The combination of a hit to demand, including from the ad boycott, and more supply has meant lower pricing for Facebook ads, which are purchased through ad auctions. But the extra supply is still a positive.
As auto and travel advertising dropped off early in Q2, lower-priced ads met ROI needs for gaming and e-commerce advertisers that stepped up.
Facebook Shops
Most commerce that Facebook facilitates, when businesses connect to customers via Facebook and Instagram, happens outside of Facebook. Yet Facebook has now begun to allow businesses to set up shops on Facebook and Instagram rent-free, partnering with Shopify (SHOP), ChannelAdvisor and other e-commerce platforms.
Analysts see potential for a significant expansion of Facebook’s revenue stream. In a May 19 note, Deutsche Bank analyst Lloyd Walmsley wrote that he sees $30 billion as possible, through a combination of advertising revenue and a 5% fee on transactions.
Goldman Sachs analyst Heather Bellini raised her FB stock price target to 250 from 220 on June 9, keeping a buy rating. She cited potential for Facebook Shops to increase the number of advertisers. Existing advertisers may spend more on Facebook because of higher rates of converting eyeballs to sales, she wrote.
Bellini has since hiked her FB stock-price target twice more. On June 24, she raised her target to 265, citing peer valuations, low interest rates and reduced equity risk premiums. Bellini noted improving ad spending and “an even faster shift to digital” in boosting her target to 303 on July 31.
How Much Is FB Stock Worth?
Facebook stock has a market cap of $765 billion. That makes FB stock the fifth-most-valuable company on the S&P 500 index, behind Apple (AAPL), Microsoft, Google stock and Amazon stock.
FB Stock Is A Buy, But …
Wall Street analysts think this FANG stock still has a long growth runway and provides unmatched value to advertisers. Facebook has proved its mettle during an unprecedented economic downturn.
Facebook stock boasts an excellent 97 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.
Yet one big question remains: Has Facebook really moved past its political and regulatory troubles? The past few years have shown that bad news usually follows good news for Facebook and FB stock.
Bottom line: FB stock is now at a proper entry point, just above its 10-week moving average. That is actionable, with an ascending-base buy point a little higher.
But Facebook could be about to enter the uncharted waters of an antitrust case. The stock market uptrend is under pressure, giving a yellow light for new purchases overall.
If you decide to “like” this FANG stock again, make sure to keep it on a short leash.
