Facebook (NASDAQ:FB) stock — alongside the rest of the tech sector — has plunged in September, with shares falling as much as 18% in a matter of just three weeks.
Do not stress this recent weakness. This dip is little more than a golden buying opportunity, before FB stock rips significantly higher over the 12 to 15 months.
Three big reasons:
- Ad spending is on the cusp of rebounding in a big way in 2021.
- Instagram Reels will provide a huge engagement and revenue tailwind for Facebook over the next few quarters.
- Facebook stock is attractively undervalued ahead of those upside catalysts.
So, don’t overcomplicate this one. Buy the dip in FB stock. Hold for big upside in 2021.
Here’s a deeper look.
Rebounding Ad Spend
As goes consumer spending, so goes ad spending.
It’s maxim that has rung true for the past several decades, and which will continue to ring true for the next several decades, too, mostly because it just makes sense. If consumers are spending money on products and services, then brands will spend money on advertising those products and services, and vice versa.
Consumer spending has rebounded sharply over the past few months. Retail sales rose 18% in May, 8% in June, 1% in July, and 1% in August. This has, not surprisingly, coincided with a rebound in consumer mobility as consumers have grown less and less afraid of Covid-19, and businesses and governments have grown better at managing the risks of the virus while keeping this open in a safe manner.
Both of these trends will persist for the foreseeable future.
We’ve been in this pandemic for over six months now. Consumers have already made up their mind on the virus, and the majority of consumers are clearly voicing the opinion that they believe they can manage the risks of the virus and stay safe while still doing things like going to restaurants, shopping, etc. This mass opinion isn’t going to change suddenly and dramatically unless the virus changes suddenly and dramatically, which science says is unlikely.
Meanwhile, governments appear committed to keeping businesses open, so long as they remain open in a safe manner (which, in my experience, has been the case about 99% of the time). Plus, any closures going forward will be met with increased adaptability.
Overall, then, this rebound in normal consumer behavior will persist for the foreseeable future. As it does, consumer spending will keep rebounding. So will ad spending. And most of those ad dollars will make their way into the Facebook ecosystem, because it’s the most potent digital ad channel in the world.
Rebounding ad revenue growth rates at Facebook over the next few quarters should provide support for continued gains in FB stock.
Instagram Reels will Drive Engagement Growth
Adding fuel to Facebook’s rebounding growth narrative over the next few quarters will be robust uptake of Instagram Reels.
Reels is Facebook’s TikTok clone. Facebook hopes that Reels will do to TikTok what it’s previous copycat feature, Instagram Stories, did to Snap (NYSE:SNAP) back in 2016/17. That is, steal TikTok’s thunder and ultimately turn into the number short video app/feature in the world, thereby providing a huge lift for Facebook’s usage and ad revenue numbers (since ad dollars follow eyeballs).
I think that’s exactly what will happen.
TikTok VS Instagram Reels
TikTok has come under tons of scrutiny over the past few months thanks to U.S. President Donald Trump trying to ban the app. That ban won’t come to fruition. But the publicity alone has caused people to leave the app. There has been a noticeably large exodus of top TikTok creators over the past few months, the app’s download rank in the U.S. iOS App Store has been trending lower over the past 90 days, and many friends I talk to — some of whom were daily TikTok users back at the height of the pandemic — have since deleted the app or just don’t use it anymore.
In other words, it appears we have seen “peak TikTok”.
Sure, not everyone leaving the TikTok platform will immediately start using Reels. But a large portion will.
About 90% of TikTok users believe that Reels is “basically the same“, while over 60% say that because of Reels, they will start spending more time on Instagram. That shouldn’t come as any surprise, because Instagram offers all-in-one-app convenience and global distribution — two things which TikTok notably lacks.
To that extent, Instagram Reels will see huge uptake over the next few quarters, sparking increasing usage numbers over at Facebook, which will in turn spark accelerated revenue growth. Much as this dynamic did back in 2016/17, it will spark huge gains in FB stock in 2021/22.
Facebook Stock is Undervalued
It helps that, ahead of these two big upside catalysts, Facebook stock is attractively undervalued.
My numbers suggest that — assuming Facebook leverages its sticky global social media ecosystem to remain one of the two largest players in the still booming digital ad market, and simultaneously builds out an e-commerce business with mild uptake — that the company will do at least $20 in earnings per share by 2025, and likely more.
Based on a 20-times forward earnings multiple and an 8.5% discount rate, that implies a 2021 price target for FB stock of about $315 — which means FB stock has visible and fundamentally supported runway to 25%-plus gains over the next 12 to 15 months.
Bottom Line on FB Stock
Facebook stock is a long-term winner, with huge near-term upside catalysts, that’s being dragged down by macro-market noise in September.
Ignore that noise. Roll into the dip. Exercise patience. And let strong fundamentals carry this stock way higher over the next few quarters.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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