Although I believe that digital advertising, in general, will continue to beat the expectations of bears, I think that Facebook (NASDAQ:FB) still has multiple, negative, company-level catalysts. As a result, I recommend that investors avoid FB stock ahead of the company’s first-quarter results which are due to be reported after the market closes.
On April 21, Facebook’s rival, Snap (NYSE:SNAP), the owner of social media website Snapchat reported earnings per share that were in-line with analysts’ average estimate. But the company’s revenue beat the mean outlook, and its overall Q1 results likely came in well above bears’ expectations.
Further, the Snap’s user base surged 20% year-over-year last quarter, and its revenue jumped 25% YOY in March. Even in the initial few weeks of April, its sales increased 15% YOY. Snap’s stock surged nearly 40% on the results.
Similarly, Roku (NASDAQ:ROKU) stock surged after the streaming TV platform operator reported preliminary Q1 results on Apr. 13. Its active accounts jumped by 3 million in Q1, and its streaming hours soared 49% YOY.
As I wrote in an April 17 column on Roku, “the company raised its first-quarter revenue guidance range to between $307 million and $317 million, versus its previous forecast of $300 million to $310 million.”
In my March 27 article on Roku, I predicted that TV viewership would surge tremendously. I added that worries about ad revenue were exaggerated because some sectors of the economy, such as supermarkets, were “booming.”
Better Investments Than FB Stock
Among the other companies that are doing very well are Amazon (NASDAQ:AMZN), Domino’s (NYSE:DPZ), Netflix (NASDAQ:NFLX), eBay (NASDAQ:EBAY), Walmart (NYSE:WMT), car insurance companies, and video-game makers such as Activision (NASDAQ:ATVI) and Take-Two (NASDAQ:TTWO).
One factor that could be helping these companies is the fact that most of the nation’s highest earners haven’t lost their jobs. That’s because multiple sectors — including tech, finance, healthcare and government — that tend to pay their employees the most haven’t been hurt much by the coronavirus crisis and the recession.
Finally, as Investor’s Business Daily pointed out recently, “companies [still] want to get their brand identity in front of consumers.” I believe that’s because they want to ensure that consumers remember to resume buying their products and services when the lockdowns end. For example, I’ve seen ads on Roku for Las Vegas casinos and used car retailers.
Pre-Crisis Issues and Facebook
Despite these positive catalysts, on March 24, Facebook warned on its blog that “our business is being adversely affected like so many others around the world. ”
The company stated that it does not generate revenue from parts of its websites, including Messenger, that were generating huge traffic increases during the pandemic.
But I think a negative catalyst that I discussed in-depth before the crisis is probably weighing on Facebook’s results much more than its failure to monetize some of its assets. Specifically, I noted that Facebook had indicated that its results would be hurt by Google’s decision to make “it more difficult for other websites, including Facebook, to trace the surfing history of consumers through cookies.”
Meanwhile, Facebook’s need to continue to spend a great deal of money on protecting its users’ privacy will likely continue to weigh on the company’s bottom line.
On a positive note, Facebook announced on April 24 that it would launch a videoconferencing product that will support groups of up to 50 people. Given Zoom’s (NASDAQ:ZM) well-publicized security problems, Facebook’s competing product could easily attract many users and advertisers.
Further, when Facebook reports its results today, it may announce that the product has already attracted millions of users. That news could excite investors.
The Bottom Line on FB Stock
The results from Snap and Roku show that digital ad revenue isn’t dropping significantly.
But Facebook will continue to be hurt by higher spending on security and Google’s rule change. Meanwhile, FB stock is only down about 15% from its mid-February levels. As a result, I would recommend avoiding the shares and buying Roku and/or Snap instead.
As of this writing, Larry Ramer owned shares of Roku stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer.