After running above $300 for the first time ever in late August, Facebook (NASDAQ:FB) stock has since retreated and been largely range-bound between $250 and $280.
This earnings season, FB stock looks optimally positioned to breakout to the upside of this trading range on the back of a blowout third quarter earnings report.
That report is due out after the markets close on Thursday, Oct. 29.
Why is the report going to be good? Because we are in the midst of digital ad boom, and Facebook and Instagram are at the epicenter of this boom.
How high could Facebook stock go? You could easily see the stock run back to its $300+ all time highs by November, implying 10%-plus upside over the next two weeks alone.
Perhaps more importantly, this breakout in FB stock could be the beginning of a much bigger uptrend wherein shares soar to $400 in 2021.
Needless to say, then, now looks like a great time to buy Facebook stock.
Here’s a deeper look.
Digital Ad Boom
When social media platform Snap (NYSE:SNAP) reported blockbuster third quarter numbers in late October that absolutely smashed user, revenue and profit expectations, the company broadly confirmed one thing: we are in the midst of a digital ad boom, the likes of which will hugely benefit FB stock.
Here’s the story.
The novel coronavirus pandemic brought the global economy to a screeching halt at the end of the first quarter of 2020. With the economy not moving, companies stopped advertising. But, we have since adjusted to living with the virus, and economic activity has rebounded. As economic activity rebounded, companies have put ad dollars back to work, because consumers are spending again.
Yet, consumers’ Covid-19 adjustment include living a more “digital” life — i.e., consumers are spending more time than ever on social media platforms. So these ad dollars that are going back to work, are skipping the TV, radio and billboard ads, and instead rushing at breakneck speeds into digital channels.
The result is a perfect operating environment for social media platforms. They are broadly benefitting from a simultaneous rise in engagement (because of pandemic restrictions) and advertiser demand (because of rebounding consumer spending) — a winning combination which is fueling accelerating user, revenue and profit growth.
Blowout Earnings on the Horizon
The weight evidence today strongly suggests that not only is Facebook taking part in this digital ad boom, but that Facebook is actually at the epicenter of it all.
Multiple major Wall Street firms — including Jefferies, Cowen, Deutsche Bank and Oppenheimer — have hiked their price targets on FB stock over the past month alone, with the common thread being that channel checks suggest a rapid ramp in Facebook and Instagram ad spend.
Meanwhile, new research from Kantar and Pathmatics shows that Facebook and Instagram meaningfully expanded their share of digital ad spending in the second quarter of 2020 — a trend which likely continued into the third quarter as ad spending trends continued to recover.
Even further, Piper Jaffray’s semi-annual Taking Stock with Teens Fall 2020 survey found that Instagram remains the most frequently used app among young Americans. That’s big, because Snap’s earnings showed us that demand to advertise to that younger demographic through social channels soared in the third quarter. Presumably, many of the brands that accelerated their Snap advertising in Q3, also accelerated their Instagram advertising.
Connecting the dots, it appears that Facebook’s ecosystem of social media properties are right at the heart of the current digital ad boom.
To that end, this digital giant will likely follow in Snap’s footsteps and report blowout third quarter numbers in late October. FB stock, much like SNAP stock, will roar higher on the back of those strong results, likely to $300+ levels.
Huge Upside Potential for Facebook Stock in 2021
The earnings season breakout in FB stock could be the start of a much bigger and longer uptrend wherein shares soar to $400 in 2021 for one big reason: Instagram Reels.
Facebook recently launched Instagram Reels, a short-video feature which is essentially Facebook’s copycat of TikTok.
Facebook management hopes that Reels will do to TikTok in 2020/21, what Stories did to Snap in 2016/17 — which is essentially steal all of the viral app’s engagement and momentum, channel it into the Instagram ecosystem, and spark a multi-quarter stretch of accelerated user, revenue and profit growth.
I think that’s exactly what will happen.
There’s already a huge exodus happening on TikTok, partially because of concern regarding U.S.-China geopolitical relations and partly because the content on the app has become too political and polarizing.
At the same time, Instagram Reels engagement is flying higher, largely because it looks, feels and acts just like TikTok — except without the geopolitical risks and polarizing political content. Plus, Reels offers far wider distribution, given that Instagram has far more users than TikTok.
This is just the beginning of the huge TikTok-to-Reels transition. Much like the Snapchat-to-Instagram transition in 2017, this transition will lead to a series of double-beat quarters for Facebook in 2021.
In 2017, FB stock rose more than 50%. A similar return in 2021 would put FB stock well above $400 by the end of the year — a level which my long-term model says is fundamentally supported.
Bottom Line on FB Stock
Facebook stock is a long-term winner, with two huge near-term catalysts on the horizon in the form of strong Q3 earnings and rapid Reels uptake in 2021. Together, these two catalysts have enough firepower to push FB stock to over $400 within the next 12 months.
That represents more than 50% upside from current levels, which means that Facebook stock is one of the best large-cap tech stocks to buy now and hold throughout 2021.
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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