Last year was downright horrible for Facebook (NASDAQ:FB) stock. The company’s shares significantly lagged those of other big tech names like Microsoft (NASDAQ:MSFT), Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
But in the new year, sentiment towards Facebook stock has completely turned around. So far, FB stock is up about 8% in 2019.
But next Wednesday after the market closes, when the company will report its fourth-quarter results, we’ll get a test of the strength of the rally of FB stock.
So what is Wall Street looking for? Well, analysts on average expect Facebook’s revenues to come in at $16.41 billion, up over 26% on a year-over-basis. But during the fourth quarter of 2017, the company’s revenues spiked by 47%, so analysts think that its top-line growth sharply decelerated.
The company’s adjusted earnings are expected to be $2.17 per share of FB stock, off about 1% from the same period a year earlier.
Since Facebook’s base is so large, it’s having a tougher time generating growth. It’s also important to note that FB is undergoing a major transformation, as CEO Mark Zuckerberg has indicated that 2019 will be a year of “investment.”’
One headwind for FB stock is its new strategy of being less reliant on the newsfeed and instead focusing on offerings like Stories. While this is probably good for users, the transition will hamper monetization, at least in the near-term.
But of course, the biggest issue for Facebook stock is privacy. True, it does not look like the various controversies and flubs have had much of an impact on the company’s user growth. But then again, regulatory backlash could still affect FB stock. Consider the following:
- Germany’s antitrust authorities expect to release their judgment, early in 2019, on whether Facebook has abused its market power. Even though FB will not be hit by any monetary sanctions, it could be forced to change its business practices. And that could slow its growth.
- It appears that the U.S. Federal Trade Commission (FTC) is close to taking action against Facebook. The buzz is that the agency wants to levy a heavy fine on FB (although it is far from clear how large the fine could be). In the meantime, Congress has been looking at ways to reign in FB.
Despite all this, there are silver linings. First of all, FB has a strong balance sheet. In other words, any fines will probably not make much of an impact on Facebook stock, and there will certainly be appeals of any highly adverse ruling.
Secondly, intensified regulations may ultimately boost Facebook stock, since they could make it harder for rivals to gain traction.
The Bottom Line On FB Stock
Facebook’s platform remains highly attractive to advertisers because of its large size and the valuable data it has. The core app caters to an older demographic, whereas Instagram skews towards younger people.
More importantly, FB stock is being boosted by a continuous trend of ad dollars moving to digital platforms. According to research firm IDC, spending on digital ads is expected to go from $229 billion in 2017 to $360 billion by 2021, which is a compound annual growth rate of nearly 11%.
If anything, the current projections for FB’s revenues may be too pessimistic. In fact, ahead of the company’s earnings report, various Wall Street analysts have become much more upbeat on FB stock. JPMorgan (NYSE:JPM) has indicated that Facebook stock is one of its “best ideas,” and RBC Capital says that Facebook stock is a top-ten name for 2019.
After all, FB stock, with a forward price-earnings multiple of 20, is still fairly cheap. That is a decent discount to the company’s projected growth rate of about 26%.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.