The last two years of this decade have been a tale of two cities for social media behemoth Facebook (NASDAQ:FB). In 2018, Facebook was hit hard by data privacy concerns. Revenue growth slowed meaningfully, expenses ballooned in an effort to up data security and margins dropped. Facebook stock consequently collapsed in a big way. From $180 at the start of 2018, to $130 by the end of the year.
Calendar 2019 has been the exact opposite. Data privacy concerns have faded into the background. Revenue growth rates have stabilized in the upper-20% range. Operating margins have similarly stabilized in the mid-40% range as expense growth has moderated. Facebook stock has popped. From $130 at the start of 2019, to over $200 heading into the last month of the year.
In the big picture, 2018 was the “fluke” year, and 2019 is the norm. Indeed, heading into 2020, Facebook stock looks positioned to repeat on its 2019 successes. That is, big revenue growth coupled with healthy margin performance should drive significant gains for FB stock over the next twelve months.
In particular, there are two big drivers here that should push Facebook stock to $250 in 2020. Those two big drivers are expanding share in the secular growth digital advertising market through increased ad real estate, and a big push into the e-commerce world with initiatives like Facebook Pay and Instagram Shopping.
Facebook’s Ad Business Will Remain Strong
The first big driver of Facebook stock in 2020 is continued 20%-plus growth in the digital ad business.
The idea here is simple. Yes, the digital ad market is slowing, from a ~20% growth industry over the past few years, to a low double-digit growth industry over the next few years. Also, yes, competition in that market is ramping as Amazon (NASDAQ:AMZN), Snap (NYSE:SNAP), Pinterest (NYSE:PINS) and others more aggressively grow their ad businesses.
But, Facebook is an irreplaceable player in this market with a ton of room to expand market share. Specifically, Facebook and Instagram are so big with so many users that they are necessary parts of every digital ad budget. Regardless of how big Amazon, Snap, or Pinterest get, it is highly unlikely that businesses will cut back on their Facebook or Instagram ad spend. Instead, they will pull ad spend from smaller platforms with less reach — like Twitter (NYSE:TWTR) — and maintain robust spend on Facebook and Instagram.
At the same time, Facebook is only monetizing two of its four one-billion-user-plus platforms with ads. Messenger and WhatsApp are still largely absent of ads. Yet, those are two of the most used communication apps in the world, with the implication being that Facebook has a huge opportunity to increase ad real estate on those platforms and significantly expand its share of the global digital ad market.
The big picture: Facebook’s secular digital ad tailwinds will remain robust in 2020, and perhaps even become more robust as Messenger and WhatsApp get ads. This sustained robust growth will keep Facebook stock on a winning path.
Facebook’s Commerce Initiatives Will Gain Traction
The second big driver of Facebook stock in 2020 is the company’s big push into the e-commerce world.
Facebook is in the early stages of testing its various e-commerce growth initiatives. At present, these initiatives mostly revolve around Facebook Pay and Instagram Shopping. Because Facebook is still testing these initiatives and because they are still very young, neither of them have gained much traction, and neither are contributing any meaningful revenue.
That could all change in 2020.
Facebook has a unique opportunity here to turn Facebook Pay and Instagram Shopping into forces to be reckoned with in the multi-hundred billion dollar e-commerce market. Consumers are already spending several hours every day browsing through various products and services in their Facebook and Instagram feeds. All Facebook has to do to turn this browsing into purchasing is implement a seamless, in-house payment service, and make the native feeds “shoppable”.
That’s exactly what Facebook is doing with Facebook Pay and Instagram Shopping. Over the next twelve months, these two commerce initiatives should gain material traction. As they do, they will illuminate a bright future for Facebook in e-commerce, which will spark persistent buying pressure that will keep FB stock trending higher.
Facebook Stock Has Upside to $250
The two aforementioned big growth drivers have the potential to drive Facebook stock to $250 in 2020.
The numbers here are simple. Facebook presently owns about 20% over the digital ad market, up from 9% share in 2014. Into 2025, Facebook should be able to expand its digital ad market share to 25%, behind increased ad real estate across its ecosystem. This dynamic should power 13-15% revenue growth in the digital ad business over the next few years. Realistically, I think digital ad revenues can measure around $150 billion by 2025.
At the same time, Facebook should gain share in the e-commerce market quite quickly, given its already huge user base. Just look at what Amazon did in the digital ad market. They leveraged their huge e-commerce user base, to become a huge digital ad player in just a few years. Facebook will do the same in the e-commerce market. By 2025, I reasonably think that 2.5% of global e-commerce sales will happen through the Facebook ecosystem.
Assuming a 5% take rate on those sales, I think Facebook’s commerce revenues will measure around $10-11 billion by 2025, pegging total Facebook revenues at $160 billion-plus by 2025 (up more than 15% per year from 2019’s projected revenue base). Further, assuming that Facebook’s expense base grows at a low double-digit pace into 2025, then profit margins should expand over this stretch, too.
Putting all this together, Facebook has a visible opportunity to hit $20 in earnings per share by 2025. Based on an information technology sector average 20-times forward earnings multiple, that implies a 2024 price target for Facebook stock of $400. Discounted back by 10% per year, that equates to a 2019 price target of nearly $250.
Bottom Line on FB Stock
Facebook stock is a long-term winner that lost its groove in 2018, but found it again in 2019. Into 2020, and over the next few years, Facebook stock will keep its groove, powered by sustained big digital ad growth and a big push into e-commerce. Together, those two drivers should drive FB stock toward $250 over the next twelve months.
As of this writing, Luke Lango was long FB and PINS.