Social media usage has risen over the past few weeks as more people are forced to stay at home amid the ongoing Covid-19 pandemic. In recent reports, social media giants such as Facebook (FB), Twitter (TWTR), Snap (SNAP) and TikTok have reported increased engagement.
As the biggest player in the sector, Facebook has been a beneficiary of this. The company recently reported that messaging across its assets has increased by more than 50 per cent. However, this surging usage has not been replicated in the company’s financials.
The main reason why Facebook’s finances could be hurting is that companies are not spending a lot in advertising as they used to do before the virus outbreak. Instead, many businesses are preserving cash to survive the looming uncertainty.
As a result, FB stock has been punished. Year-to-date, its share price has dropped by more than 16 per cent, which is a worse performance than that of the S&P 500 (US 500) and Nasdaq-100 (US 100), which have dropped by about 14 per cent and 7 per cent respectively.
Why investors still choose Facebook in 2020
Still, Facebook is one of the most admired companies in the investment community. According to data gathered by Barrons, Kiplinger’s and Business Insider, it is one of the top holdings among many hedge funds.
There are several reasons why investors simply love Facebook. First, the company owns some of the most powerful online services in the world. WhatsApp is the default messaging app to many people, while Facebook is the biggest social media platform around the globe, with more than 2.5 billion users. Instagram is the biggest image-based social media platform. By owning these products, the company has a wide moat that is almost impenetrable.
Second, Facebook is the second-biggest advertiser. In 2019 alone, the company made more than $70 billion. This made it second only to Google (GOOGL), which made more than $161bn. Most importantly, the business is now growing at a faster rate than Google. Facebook has forward revenue growth of more than 20 per cent compared to its rival’s 15 per cent.
Third, Facebook has one of the healthiest balance sheets in the US. The company has more than $54bn in cash and just $11bn in long-term debt. This means that the firm will eventually thrive even if it goes through a slowdown this year. In addition, those figures mean that Facebook has the ability to acquire some companies it could not buy a few weeks ago because of their hefty valuations.
Finally, investors love Facebook because of its business model, which leads to higher margins. It has a gross margin of more than 81 per cent compared to Google’s 55 per cent and Twitter’s 67 per cent. Interestingly, Facebook has the ability to increase its margins by giving up some of its unprofitable bets such as hardware. It also has more ways to increase its revenue by monetising platforms such as WhatsApp and Facebook Messenger.
Facebook stock price analysis: performance throughout the years
If you want to invest in Facebook stock, having a good understanding of how it has performed in the past might help you to better navigate its further fluctuations.
Facebook launched its IPO in May 2012. The company priced its shares at $38, but the stock ended opening up at $48. Since then, the share price has been mainly on an upward trend, with some occasional short-lived negative fluctuations, and risen by more than 400 per cent.
The company has almost always managed to do better than analysts’ expectations. According to data from Seeking Alpha, Facebook has missed analysts’ revenue estimates only twice and earnings estimates just once since 2015.
The company’s biggest crisis happened in 2018 when the Cambridge Analytica scandal emerged. This revelation led to an increased focus on data privacy and how the business handles the vast amount of data it has. It also led to multiple investigations by the Federal Trade Commission (FTC), Department of Justice (DOJ), and multiple state attorney generals, negatively impacting the company’s public image as well as its stock performance.
In 2018, the FB share price shed more than 20 per cent. However, in 2019, the stock gained almost 60 per cent.
FB stock outlook: does it stand a chance to rise again after the pandemic?
According to Warren Buffett, the best time to buy a stock is when other people are fearful. This is because, in times of fear, one is able to scoop high-quality companies at a relatively low valuation. This is what happened in 2018 when everyone thought that Facebook would not survive the onslaught.
To make a rational Facebook share price forecast, it is important to look at the bigger picture rather than current, temporary turmoils.
Like all companies, Facebook is expected to have a challenging year as many businesses pause on their advertising campaigns. Still, as history has it, the economy always recovers after a crisis. Once the pandemic is over and uncertainty fades away, the companies will again have to advertise their products and services to make up for the damage. With our lives revolving around the internet, Facebook will be the first place for them to promote their brands.
It is also important to look at the valuation. Facebook is now valued at about $500bn. The company has a forward PE ratio of 21, which is lower than that of Google and Twitter with their forward PE of 24 and 54. It also has an EV to EBITDA of 15.33 compared to Google and Twitter’s 15 and 25.
This means that Facebook, which is growing faster, is now being undervalued compared to its key rivals.
Facebook share price forecast for 2020 and beyond
In this Facebook stock forecast, we take a look at what analysts have to say about the company.
Facebook is one of the most-covered companies by sell-side analysts. Using data compiled by Marketbeat, we see that most Facebook stock predictions are in the upside. The most bullish predictions come from Loop Capital, Monness Crispi, SunTrusts, and RBC Capital Markets who still expect the stock to rise from its current valuation of $160.
Meanwhile, Wallet Investor, a famous online forecasting service, gives less bullish Facebook stock predictions, expecting its stock to trade at the maximum of $172 this year.
According to Long Forecast, the Facebook stock could end the year at around $166.
Technical FB stock projections
So, will Facebook stock go up? To answer this question, other than looking at the fundamentals, it is also important to look at stock’s chart formation to determine the shorter-term Facebook share forecast. Looking at the daily chart below, we see that FB stock is trending upwards as it tries to pare back losses made in March.
As Facebook share price analysis shows, the stock has managed to move past the 38.2% Fibonacci Retracement level. This means that FB share price may continue moving upwards and test the 50% Fibonacci level at $180.
So, what is Facebook stock: buy or sell?
With all this information, is Facebook stock a good investment? As with any other asset, there is no definite answer to this question. It may depend on how long you want to invest in the company. If your goal is a short-term profit, there is a risk that the stock might drop if the coronavirus shutdown continues for a longer period. There is also a likelihood of increased volatility, especially as the earnings season nears.
However, if your goal is to invest and hold it for a longer term, it might make sense to invest in the company. It has a solid balance sheet, an impenetrable moat, potential to increase margins, a likely dividend, and a huge market opportunity as the world’s economy comes back on track. Therefore, Facebook stock in 5 years is very likely to be worth much higher than today.
Consider that analysts expect the company’s revenue to hit $165bn in 2025. If it does this, it means that its revenue will be almost at par with that of Google today. This would give it a valuation of more than $700bn.
Since the stock has experienced multiple ups and downs over the past few months, we recommend that you arm yourself with as much knowledge as possible. Do your research, consider the latest news, market trends, expert opinion and technical analysis to decide whether you want to invest your cash in the company.
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