Facebook (NASDAQ:FB) stock is down 15.6% year-to-date in 2020. In case you have been hiding under a rock, the U.S. economy is mostly shut down thanks to COVID-19. FB stock, along with the rest of the market, has suffered.
That shutdown has sent stock prices tumbling due to concerns about lost revenue and earnings. But despite its share price decline, Facebook’s business has not been negatively impacted by the outbreak. In fact, there are several reasons why FB stock is actually benefiting from the coronavirus.
Facebook’s COVID-19 Impact
For the time being, most Americans are stuck at home. Social distancing mandates are keeping families and friends apart. People are stuck at home alone. Businesses, parks, beaches, bars and restaurants are all closed. But the internet is still open for business.
For now, Facebook and other social media platforms are the only ways people can socialize. Without question, Facebook will report a huge surge in user engagement in the first two quarters of 2020.
I’ve repeatedly seen Netflix (NASDAQ:NFLX) mentioned as a stay-at-home stock winner. But Netflix has a subscription-based business model. In other words, it doesn’t matter how many hours of content Netflix’s customers watch. They still pay the same $12.99 per month.
Facebook, on the other hand, generates almost all of its revenue from advertising. The more hours users spend on the platform, the more ad money Facebook earns.
Of course, Facebook is not completely insulated from the economic downturn. I’m sure advertisers are cutting their budgets to a certain extent. But the drop in FB stock seems to suggest the uptick in engagement will not offset the drop in ad spending.
Investors won’t know for sure until Facebook reports first-quarter earnings. However, I’d bet advertisers are itching to access a massive audience of stir-crazy Americans with nothing else to do.
Analyst Take on FB Stock
Tigress Financial analyst Ivan Feinseth says COVID-19 actually gives Facebook a chance to demonstrate to the world how valuable its platform truly is.
“The COVID-19-driven global quarantine is making FB the number-one place for everybody to connect for social, entertainment, business, and information needs,” Feinseth said.
He said Facebook continues to innovate with new feature roll-outs and has a significant opportunity to further monetize its massive user base. Quarter after quarter, Facebook reports impressive growth numbers. In the last quarter of 2019, Facebook reported 24.7% revenue growth, 90 million new monthly users, and a 6.7% increase in net income. It also significantly increased its average revenue per user.
Facebook also has an extremely strong balance sheet, which is currently one of the top priorities on Wall Street.
“FB’s strong balance sheet and cash flow continue to drive new growth initiatives, fund strategic acquisitions and enhance shareholder returns with ongoing share repurchases,” said Feinseth.
Tigress has a “strong buy” rating for FB stock.
COVID-19 Is a Distraction
There’s also another subtle benefit from the COVID-19 outbreak for Facebook. Prior to the recent economic chaos, one of the biggest concerns for FB stock investors was regulatory action. In July 2019, the Federal Trade Commission fined Facebook $5 billion due to data privacy violations. Former presidential candidate Elizabeth Warren and others have been repeatedly calling for a breakup of Facebook. Following the Cambridge Analytical scandal, Facebook has been under a tremendous amount of political and regulatory pressure in recent years.
Fortunately for FB stock investors, COVID-19 has put privacy, data security and antitrust concerns about as far on the back-burner as they can go.
When human lives and jobs are at stake, voters don’t want to see Congress digging into the minutia of Facebook’s data usage policy. In other words, the coronavirus has taken the heat off of Facebook and the other big tech stocks. I’m guessing it will be at least another year before anyone cares about regulatory crackdowns on Silicon Valley again.
How to Play FB Stock
Facebook’s engagement is up since the economic shutdown. Facebook’s balance sheet is healthy, and FB stock is a compelling value compared to other tech stocks. Facebook’s forward earnings multiple is just 17.3, the lowest of all the FANG stocks.
The company is even adapting to capitalize on opportunities COVID-19 has created. Facebook is reportedly launching a new Messenger desktop app for video conferencing and group chats. It’s also hiring another 10,000 employees by the end of the year and issuing $4 million in grants for struggling small businesses.
For years, FB stock was too risky because social media had essentially no barrier to entry for competitors. Today, Facebook, Instagram, Messenger and the company’s other products offer differentiated value.
Not only has Facebook’s business likely navigated the coronavirus shutdown, it has certainly benefited in a handful of ways. There’s nothing wrong with having FB stock as a core portfolio holding.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.
