Summary:
- Facebook's ad business could face a slowdown after Apple’s software change, giving users more power on their data sharing.
- This temporary headwind should be a buying opportunity, as FB earnings growth is strong with its new e-commerce tools.
- The majority of analysts have a buy rating on the stock.
Investors in Facebook (NASDAQ:FB) 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 powerful run this year?
In the wake of the company’s second-quarter earnings last month, it seems these worries have overtaken all the good news that CEO Mark Zuckeberg shared with investors. Despite beating analyst estimates on both the top and bottom line, FB stock has lost its momentum, falling more than 3% since the announcement.
Before the second-quarter earnings release on July 28, FB was one of the best performers among the group of FAANGs, which include Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN). Shares of the Menlo Park, California-based company have soared more than 30% this year, pushing its market capitalization beyond the $1-trillion mark during the past quarter.
Going forward, however, there are concerns that the company’s growth will slow significantly, making its stock less attractive when compared with other opportunities in the market. Some investors were disappointed to hear from executives that year-on-year revenue growth rates in H2 are expected to “decelerate significantly.”
The biggest uncertainty is coming from Apple’s new restrictions on iPhone data collection, which require users to explicitly allow app makers to track their activity. The company has said for several quarters that its advertising business faces risks from Apple’s recent iOS software update.
Industry-wide, users are opting to give apps permission to track their behavior only 25% of the time, according to Bloomberg citing Branch, which analyzes mobile app growth. Reduced tracking means it will become tougher for Facebook and other online companies to tailor and target their ads in order to help businesses find their most promising customers.
Temporary Headwind
Without doubt, Apple's software update will create a temporary headwind for FB earnings. But investors who've been following Zuckerberg, know he is very capable of overcoming these challenges. This temporary slowdown in growth, in our view, offers a buying opportunity for long-term investors.
The post-pandemic environment, and the businesses’ strong push to target customers online, further supports this bullish view on Facebook. There is strong evidence showing that advertisers’ massive spending over the past year to reach consumers online will stick. Plus, they can’t avoid the world’s largest social media platform.
FB’s quarterly numbers continue to support this view. Sales in Q2 jumped 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 Facebook will continue to benefit from a rise in consumer spending on brands publicized directly through its apps, which also include Instagram and WhatsApp. In a recent note, Canaccord Genuity maintained its buy rating on the stock, raising its price target to $420 from $380.
“While these privacy changes continue to add uncertainty to Facebook’s outlook, the ongoing shift of ad spend to digital channels and the company’s efforts to integrate commerce across its platform should support continued strong growth, which combined with a reasonable valuation supports our favorable view on the stock.”
Credit Suisse analyst Stephen Ju upped his target price to $500 while maintaining his “outperform” rating, saying that free cash flow growth could accelerate. He based his thesis on the following points:
“Potential for better than-expected ad revenue growth on product innovation (Facebook Shops, Search in Marketplaces, etc.), Street models are too conservative and underestimate the long-term monetization potential of other billion-user properties like Messenger and WhatsApp, optionality for faster FCF growth and greater efficiency on content screening/security costs.”
Baird’s analyst Colin Sebastian, while raising his target to $390 per share from $340, said pullbacks in FB stock are buying opportunities ahead of seasonally stronger consumer spending trends and increasing benefits from commerce/transactions showing up in Q4.
These bullish sentiments were also evident in an Investing.com poll of 50 analysts, whose average price for the next 12 months shows an 11% upside, with 43 buy ratings.
Chart: Investing.com
New E-commerce Tools
For long-term investors, there are many reasons to believe that FB stock has more room to run. The internet content and information company has been fueling future growth by investing in new e-commerce tools that let small businesses 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, allowing potential customers to see how products, such as makeup and shoes, look on customers’ faces and bodies. Facebook is also expanding the ways firms can communicate with their customers using WhatsApp, for example by alerting people when a popular item is back in stock.
On an earnings call with analysts, Zuckerberg also focused on his plans to invest more in content creators, improve commerce features and build a meta-verse—what he described as a social digital environment unlike any that currently exists.
Said Zuckerberg on the conference call:
“The defining quality of the meta-verse presence is this feeling that you're really there with another person or in another place. Creating avatars and digital objects are going to be central to how we express ourselves.”
Bottom Line
Facebook stock, in our view, is entering a weak patch as investors wait on the sidelines to see how Apple’s recent software changes affect its ad sales. But any potential weakness in its share price should be considered a buying opportunity. The company’s subscriber base of more than 2.85 billion users and its unique utility for small businesses continue to make its shares an attractive investment over the long run.