Facebook (NASDAQ:FB) stock has come under pressure recently as a movement to boycott advertising on the social media platform, because of the company’s inability to censor hate content and misinformation, has gained momentum.
Coca-Cola (NYSE:KO). Starbucks (NASDAQ:SBUX). Verizon (NYSE:VZ). Geico. V.F. Corporation (NYSE:VFC). Ben & Jerry’s. Eddie Bauer and REI are just some the headline brands which have joined the Facebook ad boycott in recent weeks. Naturally, as that list has grown longer, FB stock has gone lower.
Just a few days ago, this was a $240 stock. Now, Facebook stock trades around $220.
My two cents? Buy the dip. With both hands. For three big reasons:
- This ad boycott is small and temporary. By the fall, it will be non-news.
- Economic activity, consumer spending and advertising trends all continue to improve, even in the face of rising novel coronavirus case counts.
- FB stock remains one of the most attractively valued long-term growth stocks in the market.
Let’s take a deeper look.
Not a Big Ad Boycott
In the big picture, this ad boycott is small and temporary.
First, it’s small in the sense that everyone advertises on Facebook and Instagram. As of early 2019, Facebook alone had 7 million advertisers. Accounting for growth since then and additional advertisers on Instagram, it’s quite likely that somewhere around 10 million brands advertise on Facebook and Instagram. None of those advertisers represent more than 10% of Facebook’s revenues.
So far, you can count on two hands the number of notable companies boycotting Facebook advertising.
In other words, while it may seem like a big deal that Verizon and Coca-Cola are pausing ad spending on Facebook, it really is not in the big picture.
A Temporary Boycott, Too
Second, and more importantly, this is all temporary. Remember the big YouTube advertising boycott that happened in March 2017 because brands’ advertisements were appearing next to hate content? Sounds super-familiar to this boycott, right?
Well, that boycott was much bigger than this current Facebook boycott. The likes of Verizon, AT&T (NYSE:T), Johnson & Johnson (NYSE:JNJ), Toyota (NYSE:TM) and Walmart (NYSE:WMT) were all a part of the 2017 YouTube boycott.
And yet, by October 2017, the boycott was over. And YouTube has continued on its huge growth trajectory ever since.
The same thing will happen with this boycott, because in reality, brands need platforms like Facebook and YouTube, more than those platforms need brands. Facebook’s ecosystem offers unparalleled reach to a global audience of nearly 3 billion people with the most advanced data-driven ad techniques in the world so brands can deliver their message to the right audience.
If you want to run a successful consumer-facing business in 2020, you need to advertise on Facebook.
So Facebook will fix a few things. Brands will be appeased by those fixes. And by the fall, all brands will be back advertising on Facebook, implying that current weakness in FB stock is ephemeral.
Meanwhile, the economic backdrop for Facebook is steadily improving.
Sure, all of those trends will be challenged by a rapid rise in Covid-19 case counts across the U.S.
But no one wants to go back to where we were in March or April, and so governments, businesses and consumers alike will increasingly learn to how to keep the world turning while managing down Covid-19 risks with things like social distancing and wearing masks. All three parties will only get better at this balancing act over the next few months. As they do, economic activity will continue to improve while human costs of the virus will remain mitigated.
From this perspective, I fully expect consumer spending and brand advertising trends to continue to improve into the end of the year. Such sustained improvements will help provide support for a continued rally in FB stock.
FB Stock is Undervalued
Facebook stock remains one of the most attractively valued long-term growth stocks in the market.
Given the Facebook’s dominant position in the secular growth digital ad market, as well as the company’s ability to expand that dominant position via increased ad real estate on WhatsApp and Messenger and its new forays into the secular growth e-commerce market, this is a company which will undoubtedly sustain 10%+ revenue growth over the next five years.
Profit margins will improve as huge data privacy investments phase out, and positive operating leverage kicks in against double-digit revenue growth.
My modeling suggests that, given those assumptions, Facebook is on a glide path towards $20 in earnings per share by 2025. Based on a 20-times forward earnings multiple and a 10% annual discount rate, that implies a fair 2020 price target for FB stock of roughly $275.
That’s about 25% higher than where shares trade today.
Bottom Line on FB Stock
FB stock is a long-term winner getting hit on some rather small headwinds that will ultimately pass by the fall.
As such, for longer-term investors, this dip in FB stock is a buying opportunity, and nothing more.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long FB.