Facebook (NASDAQ:FB) recently ended its downtrend when markets recovered and investors accumulated FB stock ahead of its fourth-quarter earnings. The bet paid off because the social networking behemoth quieted naysayers once again. Q4 profits climbed an impressive 61%. Yet if the company is forecasting revenue deceleration and ad profit margins dropping, how is Facebook expected to come out ahead of the competition?
Facebook reported revenue rising 30% to $16.9 billion. Mobile ads accounted for almost all of that, at 93%. Advertising revenue from mobile grew 36% from last year to $15.5 billion. Conversely, the desktop site is clearly an irrelevant source for sales which is good news for investors. As ad-blocking and general desktop traffic fall, Facebook’s results will be unaffected. On the mobile front, as smartphone makers refresh devices to drive growth, Facebook’s mobile traffic will only benefit.
Facebook said that 2.7 billion people access its family of products — Facebook, WhatsApp, Messenger and WhatsApp. Even though WhatsApp and Messenger are popular and growing, Facebook’s core strength is still with News Feed. Still, videos outside of the feed will become a meaningful source of attracting users and lifting the time spent on the site. Minimizing the displacing of social interactions is the only thing FB must avoid as it promotes video content. Because as long as users stay connected to friends and family, they will keep coming back to the site.
FB Stock and Seasonal Strength
Facebook’s management hinted that seasonal strength contributed to the impressive quarterly results. During the holiday period, advertisers benefited as Facebook users searched for gifts and deals. The launch of messenger stories also drove advertising revenue in the period. By letting advertisers buy story ads across Facebook, Facebook Messenger and Instagram, the company found a way to monetize all of its properties.
Traditional newsprint media would like Facebook’s site to fail since they compete with each other. Even if that happens, Instagram is a fast-growing platform that users sign up for if they get tired of Facebook News Feeds. In Q4, Instagram’s Story section surpassed 500 million daily active users.
FB expects total revenue growth will slow in the first quarter. Investors should expect this to drop from the fourth-quarter period. The company is ramping up security spending to fight off fake users and propaganda from users coming from outside of the U.S. Management also guided full-year revenue decelerating throughout 2019.
Investors may reason that FB stock is range-bound this year if the company is not growing. Add the negative media coverage on the company and investors may get tempted to sell the stock. That action would seem irrational because Facebook continues to grow for the long-term.
On another note, while revenue will decelerate in 2019 throughout the year, Stories will drive ad loads. FB will rely more on Stories impression growth this year. So even if the overall business slows, growth in advertising customers will lead to long-term revenues re-accelerating in 2020 and beyond. All of which paint a positive picture for Facebook stock in the long run.
Risks for Facebook Stock
Facebook stock faces two major risks. First, the Washington Post reported last week that FB may have to pay a record multibillion-dollar fine related to its privacy practices. Although this will put the privacy breach scandal behind it, the company could face higher regulation that will hurt its growth.
The falling price per ad in the fourth quarter may continue in Q1 and beyond. In the last quarter, the average price per ad fell 2%, while ad impressions grew 34%. Instagram impressions increased but it is not as profitable for FB as ads posted on its main site.
Oculus Quest, the VR hardware from Facebook launches this year, and it may become a distraction or may drive operating costs. Weak sales may force the company to shut the initiative down.
Analysts are still bullish on FB stock and have an average price target of $190 on the stock (according to Tipranks). The stock might return that ~20% to investors, although it may not happen until later this year when ad sales surge during the next holiday period.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.