On the heels of a rough 2018 wherein the company’s data-privacy practices were widely scrutinized and its core business model was threatened, social media giant Facebook (NASDAQ:FB) has staged a huge rebound in 2019.
Year-to-date, Facebook stock is up an impressive 60% as those aforementioned data-privacy criticisms have largely faded, while the company’s core business has regained lost momentum. These big gains for Facebook stock will continue in 2020.
Specifically, I think there are four big growth catalysts which will push Facebook stock about 40% higher in 2020, to an all-time high price tag of $275.
What are those four big catalysts? Let’s take a deep dive into each one of them.
Catalyst 1: Digital Ad Business Sustains Big Momentum
The first catalyst that will help Facebook stock hit $275 in 2020 is sustained healthy momentum in the company’s core digital ad business. There are a few underlying drivers here.
First, digital ad market conditions will improve in 2020, as easing geopolitical tensions spark a rebound in corporate capital spending plans, of which digital advertising is a sizable chunk. Second, the core Facebook and Instagram properties will win more ad dollar share as management more deeply and optimally integrates ads into Facebook and Instagram Stories. Third, the Messenger and WhatsApp communication platforms will start to roll out ads through their feeds and stories, and new ad revenue from these platforms will push the company’s overall revenue growth trajectory higher.
Facebook’s core digital ad business will go from slowing in 2018 and 2019, to stabilizing in 2020. Digital ad growth stabilization will provide a boost to near-term investor sentiment, while improving the company’s long-term growth prospects.
Catalyst 2: E-Commerce Initiatives Gain Notable Traction
The second big catalyst for Facebook stock in 2020 relates to the company’s big e-commerce push. Specifically, through various initiatives like Facebook Pay and Instagram Shopping, Facebook is trying to make a big push into the e-commerce game. Such initiatives have yet to gain notable traction.
That will change next year. Because of big growth in influencer culture, there has been a steady rise in consumer proclivity to shop through social channels. At the same time, Facebook is just now partnering with Shopify (NYSE:SHOP) and rolling out native payment options to seamlessly turn this increased proclivity into consumer action.
All of these trends will converge in 2020. This will cause Facebook’s e-commerce initiatives to finally gain notable traction. As they do, investors will grow more optimistic about the long-term potential of Facebook’s e-commerce business. This optimism boost will provide support for further gains in Facebook stock.
Catalyst 3: Analysts Hike Forward Profit Estimates
The third big catalyst for Facebook stock in 2020 will come from Wall Street analysts.
After Facebook reports one or two strong quarters in 2020 with digital ad growth stabilization and an impressive e-commerce ramp, sell-side analysts will grow increasingly bullish on the company’s medium- to long-term profit growth prospects. They will increase forward profit estimates, reiterate “buy” ratings on the stock, and hike their price targets.
All of this favorable sell-side activity will provide Facebook stock with even more firepower to head higher over the next twelve months.
Catalyst 4: Facebook Stock’s Multiple Expands
The fourth big catalyst for Facebook stock in 2020 is underlying multiple expansion, from increasingly positive investor sentiment and low interest rates.
Facebook stock presently trades at 24-times forward earnings. That’s a pretty cheap multiple for a company that projects to grow revenues and profits by 20%-plus for the next several years. This discounted valuation is a byproduct of investor concerns with respect to the sustainability of big growth in the company’s digital ad business. In 2020, those sustainability concerns will fade as the digital ad business stabilizes, which should spark expansion in the stock’s earnings multiple.
At the same time, interest rates will likely remain lower for longer. In that environment, growth stocks with improving sentiments should generally benefit from multiple expansion, as low interest rates provide support for extended growth valuations.
Bottom Line on FB Stock
Thanks to stabilizing trends in its digital ad business, improving trends in its e-commerce business, bullish sell-side analyst activity, and a favorable valuation backdrop, Facebook stock should repeat on its 2019 successes in 2020.
The numbers here imply that $275 is doable for Facebook stock by the end of next year. Fiscal 2021 earnings per share estimates presently sit just shy of $11. When all is said and done — after Facebook reports big growth quarter after big growth quarter in 2020 — fiscal 2021 EPS estimates will likely be north of $11.
At the same time, Facebook’s forward earnings multiple might climb back up to more historically normal levels of around 25. That combination of a 25-times forward earnings multiple and $11 in 2021 EPS implies a 2020 price target for Facebook stock of $275.
Thus, I don’t think the big winning in Facebook stock is over. On the contrary, it may just be getting started.
As of this writing, Luke Lango was long FB and SHOP.
