Summary:
Facebook's advertising activity may experience a slowdown following Apple's software change, giving users more power over sharing their data.
This temporary headwind should be a buying opportunity as FB's earnings growth is strong with its new ecommerce tools.
Most analysts have a buy recommendation for the stock.
Facebook (NASDAQ:) investors have been in this position before, as they face an all-too-familiar dilemma: Is the social media giant's stock now overvalued after its vigorous run this year?
In the wake of the company's last month, it seems these concerns have overtaken all the good news CEO Mark Zuckeberg shared with investors. Despite beating analysts' estimates, both on the upside and downside, FB stock has lost momentum and is down more than 3% since its announcement.
Prior to the release of its second quarter results on July 28, FB was one of the top performers of the FAANG's group, which includes Apple (NASDAQ:) and Amazon (NASDAQ:). Shares of the Menlo Park, California-based company are up more than 30% this year, pushing its market cap over the $1 trillion mark in the past quarter.
However, going forward, there are concerns that the company's growth will slow significantly, making the stock less attractive compared to other market opportunities. Some investors were disappointed to hear from executives that year-over-year revenue growth in H2 is expected to "slow significantly."
The biggest uncertainty comes from Apple's new restrictions on iPhone data collection, which require users to explicitly allow app makers to track their activities. The company has been saying for several quarters that its advertising business is at risk from Apple's recent iOS software update.
Across the industry, users choose to allow apps to track their behavior only 25% of the time, according to Bloomberg citing Branch, who analyzes the growth of mobile apps. Less tracking means it becomes harder for Facebook and other online businesses to customize and target their ads to help businesses find their most promising customers. will create a temporary headwind for FB earnings. But investors who follow Zuckerberg know that he is very capable of overcoming these challenges. In our view, this temporary slowdown in growth offers a buying opportunity for long-term investors.
The post-pandemic environment and strong pressure from companies to target customers online further support this optimistic view of Facebook. There is strong evidence that the massive spend by advertisers over the past year to reach consumers online will continue. Plus, they can't get around the world's largest social media platform.
FB's quarterly figures continue to support this view. Second quarter revenue rose 56% to $29.1 billion as Facebook reported 1.91 billion daily active users for its flagship social network. Net income in the second quarter more than doubled to $10.4 billion.
Bullish Analysts
The majority of analysts also believe that Facebook will continue to benefit from an increase in consumer spending on brands directly through its apps, including Instagram and WhatsApp. In a recent note, Canaccord Genuity maintained its buy recommendation for the stock and raised its price target from $380 to $420.
"While these privacy changes continue to add uncertainty to Facebook's prospects, the continued shift of ad spend to digital channels and the company's efforts to integrate commerce on its platform should support continued strong growth, which in combination with a reasonable valuation supports our favorable valuation view of the stock.”
Credit Suisse analyst Stephen Ju raised his price target to $500 while maintaining his "outperform" rating, saying free cash flow growth could accelerate. He based his thesis on the following points:
"Potential for better-than-expected growth of ad revenue on product innovation (Facebook Shops, Search in Marketplaces, etc.), street models are too conservative and underestimate the long-term revenue generation potential of other billion-dollar users, such as Messenger and WhatsApp , optional for faster FCF growth and greater efficiency in content screening/security costs."
Baird's analyst Colin Sebastian, while raising his target from $340 to $390 a share, said declines in FB stocks provide opportunities for the seasonally stronger consumer spending trends and increasing trading/transaction benefits in the market. appear in the fourth quarter.
These optimistic sentiments were also reflected in an Investing.com survey of 50 analysts, whose average price over the next 12 months shows an increase of 11%, with 43 buy opinions.
Facebook consensus estimates.
Chart: Investing.com
New Ecommerce Tools
For long-term investors, there are many reasons to believe that FB stocks have more room to run. The Internet content and information company has fueled future growth by investing in new e-commerce tools that allow small businesses to sell their goods directly on Facebook's properties.
In June, Instagram announced a tool to make it easier for retailers to offer augmented, reality-powered try-on services so potential customers can see what products, such as makeup and shoes, look like on the face and body of customers. Facebook is also expanding the ways businesses can communicate with their customers via WhatsApp, for example by alerting people when a popular item is back in stock.
During an earnings call with analysts, Zuckerberg also focused on his plans to invest more in content creators, improve commercial features, and build a meta-verse — what he described as a social digital environment different from the one on this moment exists.
Zuckerberg said during the conference call:
“The defining quality of the metaverse presence is the sense that you are really there with another person or place. Creating avatars and digital objects will be central to how we express ourselves.”
Starting point
Facebook stocks are entering a weak point in our view as investors wait on the sidelines to see how Apple's recent software changes affect ad sales. But any potential weakness in the stock price should be viewed as a buying opportunity. The company's subscriber base of more than 2.85 billion users and unique utility to small businesses continue to make its stock an attractive long-term investment.
