Since the record Christmas Eve decline in the broader markets, Facebook (NASDAQ:FB) stock has staged an impressive comeback and year to date the stock is up almost 30%. When FB reported quarterly results on Jan. 30, it beat the consensus numbers and the stock soared.
Now that the earnings season is behind us, let’s look at what may be next for FB stock, which had an extremely volatile 2018. Here are the pros and cons of Facebook stock.
Pros for Facebook Stock
Leadership in Digital Ad Sales: FB’s current business model has been affected by the various scandals and privacy issues that erupted in 2018, including the Cambridge Analytica scandal, public backlash related to questionable data usage, as well as fake news and the following uncertainty over technology sector’s regulatory environment.
Yet, due to the power of the FB platform and global reach, advertisers are not moving away from spending their advertising budgets on Facebook — just the opposite, in fact. Compared to 2017, digital advertisers were happy to pay more for Facebook ads in 2018. In other words, although the “absolute time spent with Facebook in the US” has not increased, its advertising revenue was 35% more than the prior year.
Last year, global digital ad sales reached $251 billion. The growth in the industry came from internet search (which grew by 16%), video (which grew by 29%) and social media (which grew by 33%).
Although other competitors, especially Amazon (NASDAQ:AMZN), with its disruptive character, are slowly becoming contenders, Facebook — like Google — is still the choice of senior ad buyers, as it holds extensive demographic data that enables advertisers to target audiences effectively.
Strength of FB’s Ecosystem: As the owner of the largest social network in the world, Facebook’s current ecosystem includes Facebook mobile and desktop, Instagram, WhatsApp and Messenger.
Its most recent Daily Active Users (DAU) number is approximately 20% of the global population. In other words, Facebook is a clear winner in the social media space.
Facebook users are not only individuals, but also institutions, businesses of all sizes and organizations, including workplaces, community centers, schools and even places of worship.
Through the data collected on these platforms, Facebook can allow for a specific target to be reached via focused demographics, interest, and a number of other criteria. Rich and reliable data, which FB has plenty, is at the center of digital advertising.
And Facebook can easily use this data to create further venues for revenue growth. Facebook’s leadership has also never been shy to take innovative steps that will enable it to increase revenues and user growth and we can expect this trend to continue.
Potential Areas of Monetization: Social media and e-commerce markets are increasingly coming together. Because Facebook holds no debt, its strong cash position also enables its executive management to swiftly move the company forward into growth opportunities, both organically and through acquisitions.
In 2017, FB launched its video platform, Facebook Watch, an ambitious company priority, as a rival to YouTube. The company is now offering publishers and other video makers a means to monetize their videos.
Many marketers regard content offered on platforms such as Facebook Watch as a powerful means to engage with consumers, provide value, and generate sales leads.
FB’s ever-popular offering Instagram is not yet fully monetized and thus has considerable room for growth. Instagram’s Monthly Active Users (MAUs) number over 1 billion and growing. There is a possibility that the company can push Instagram into a retail sales channel, possibly through the addition of a payment app.
For example, earlier in February, FB acquired GrokStlye, a virtual shopping app, whose technology had already been integrated into Ikea‘s mobile platform so that users could conduct photo-based visual furniture searches when shopping.
Analysts believe this purchase will strengthen the company’s AI work as well as its push into social shopping, especially over Instagram and Facebook Marketplace.
For FB’s messaging apps, Facebook Messenger and WhatsApp, services like payments, chatbots and video conferencing are potential areas of revenue increase.
The market is also ripe for long-term opportunities in virtual reality, with applications in gaming and entertainment. Going forward, Facebook is likely to successfully leverage its network for further sales and earnings growth.
Cons for Facebook Stock
User Data Issues and Privacy Concerns: Since March 2018, Facebook has been in the center of damaging scandals over the placement of ads on its platforms to affect voter opinion, especially during the 2016 U.S. presidential election, as well as the 2016 European Union referendum and the 2017 national election in Great Britain.
While the data breach issues have snowballed since the spring of 2018, the company and FB stock have faced an uphill public relations (PR) battle. CEO Mark Zuckerberg has had to appear before lawmakers in the U.S. and has faced questioning.
In July 2018, the U.K.’s privacy watchdog said FB would be fined for a data protection violation and lack of transparency. In mid-2018, when the European Union (EU) finally implemented the General Data Protection Regulation (GDPR), question marks about FB’s ability to track users online negatively affected the share price.
There has been a shift in the global political environment, whereby more countries are calling for tougher regulation of the technology giants, including Facebook.
As a result, Facebook has been actively purging fake or troll pages, especially from Russia, over the past few months. Furthermore, Zuckerberg has promised increased transparency for political ads and more control over third-party use of the data.
For the past year, the price volatility in Facebook stock has reflected the company’s continuing difficulties in containing the damage caused by the start of the data privacy scandal. If similar privacy or data use concerns were to also emerge in 2019, the stock price could take another beating, as investors would simply throw in the towel until management got on top of the data issues.
Risks to User and Revenue Growth: In 2018 FB investors saw a mixed bag of quarterly reports and a plethora of PR headaches. It may not be a stretch to say that recently Facebook has become both the most-used and the least-trusted social network, creating not only a public relations dilemma, but also a decrease in user and earnings growth for the company.
Last year, over 3 million E.U.-based users “unfriended” Facebook, as, like other social media companies, it implemented changes to comply with the E.U.’s new privacy rules, General Data Protection Regulation (GDPR).
If Facebook cannot repeat its latest blockbuster growth performance in the next quarterly results, investors may decide to punish the stock later in the year.
The Bottom Line on FB Stock
Facebook stock has a strong story and the company has a clean balance sheet; thus, it remains a long-term growth play on a fundamental basis. However, there might still be stock price weakness in the near-term that potential FB stock investors should anticipate.
It is a large market cap company as well as a speculative stock. Therefore, in March and April, I expect its price to be a battleground between investors and traders. While long-term investors would like to see FB go back to $200 level, traders are likely to keep the range between $185 and $155. Expect nearer-term trading to be choppy at best,
If you already own FB stock, you might want to hold your position. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 5-7% below the current price point.
Well-performing stocks tend to keep on winning, and the recent strength of Facebook stock might be a good indication that, within three or four years, investors who buy FB are likely to be rewarded handsomely.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.