Not long ago, Facebook (NASDAQ 🙂 was a scandal, but given the strong rally of the stock this year, it can only be concluded that investors have very short memories.
In early 2018, the prospects of the Menlo Park, California-based company became gloomy, when politicians and regulators began investigating Facebook after news of a massive data breach raised concerns about user privacy. There have also been allegations of manipulation of the platform by foreign powers to influence the US elections. The stock has fallen.
But all that seems to have disappeared in the mists of history. Facebook's shares hit a record high yesterday, powered by renewed investor enthusiasm that the social media giant has wide appeal in a world ravaged by the corona virus.
The stock has now risen 11% for the year and, since the broader market decline of March 16, it has risen 56%.
At a time when the economy is entering a deep recession, Facebook is making the company so attractive through the strong investor conviction that founder and CEO Mark Zuckerberg will leverage the company's 2.6 billion user base to open new growth areas to promote.
As part of that effort, Zuckerberg on Tuesday unveiled new ecommerce features on all of the company's social media properties – including Messenger, WhatsApp and Instagram – as he prepares his platform to take advantage of the expected increase in online trading in the aftermath of the pandemic.
New Ecommerce Push
This new Facebook initiative is aimed primarily at small businesses struggling amid the pandemic. With this venture, traders can set up their own e-commerce stores on the Facebook and Instagram platforms.
Called Shops, the primary product is a new version of an existing Facebook feature with a similar name, and allows retailers to upload product catalogs to their Facebook page or Instagram profile. Stores will be accessible across the network at some point, giving retailers a direct line to Facebook's massive user base with a single product catalog.
"All of these tools are open to businesses, even if your physical showcase can't exist," Zuckerberg said in a livestream announcing the new feature on Tuesday.
Investors have welcomed this new ecommerce push. Indeed, it could mitigate the impact of loss of earnings from those segments of the digital advertising market severely damaged by the COVID-19 pandemic, including air travel and hospitality.
Analysts believe that the Shop feature will expand Facebook's e-commerce capabilities, making it a serious player in this arena.
Brian Nowak, an analyst at Morgan Stanley sees a "billions of opportunity" for Facebook at Shops, while Deutsche Bank analyst Lloyd Walmsley sees an impact of $ 30 billion through a combination of ad revenue and a fractional portion of transactions.
However, it is prudent for investors to consider the dangers to Facebook in the current environment. Analysts estimate that approximately 30% to 45% of the company's worldwide sales come from advertising categories that are considered "risk" by COVID-19.
Lower spending on travel, retail, packaged consumer goods, and entertainment is likely to harm Facebook's revenue for the next 12 to 18 months.
Bottom Line
Facebook has many ways to increase its revenues by using its enormous reach and purchasing power. That unique position makes her share a great long-term purchase. At the same time, investors should not ignore potential short-term risks to their stocks when companies worldwide reduce their ad spend.
