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High Ad Prices Have Left Facebook Just as Strong as Ever

From a fundamental perspective, there’s little to dislike about Facebook (NASDAQ:FB) stock. That has been Facebook’s situation for a long time. 

FB Stock Will Power Through Short-Term Headwinds

Source: rvlsoft / Shutterstock.com

It’s no secret that Facebook is one of the most controversial companies in existence. But don’t let that dissuade you from investing in FB stock if you have no personal beef with the company. 

Facebook’s Earnings Demonstrate Its Strength

Facebook remains a dominant force in advertising. Surprisingly, despite last year’s pandemic, when many companies were spending less money on advertising,  Facebook  reported a whopping $18.321 billion of revenue in the second quarter of 2020. 

Also interesting is the extent to which Facebook relies on advertising. Ad sales account for about 98% of the company’s revenue. 

Given the reopening of the economy this year, analysts expected Facebook’s sales to sharply rebound last quarter versus the same period in 2020. 

But the extent of the company’s Q2 revenue surge may have surprised some. Facebook’s sales jumped 56% year-over-year last quarter,  reaching $28.58 billion. 

Ad Prices

The dramatic increase of Facebook’s top line was largely caused by a surge of ad prices on its flagship Facebook website. The number of ads delivered by the company only climbed 6% YOY last quarter. However, its ad prices soared 47% YOY. 

Facebook’s ad revenue rebounded in Q3 and Q4 of last year, compared with Q2 of 2020. Thus, many expect the company’s YOY sales growth to slow following Q2 of this year. 

Indeed, in its Q1 earnings release, Facebook stated: “In the third and fourth quarters of 2021, we expect year-over-year total revenue growth rates to significantly decelerate sequentially as we lap periods of increasingly strong growth..”

That could have lead investors to believe that Facebook was facing a tougher outlook in the second half of the year. That, however, isn’t true. In the last month, the average analyst rating on the shares has become more bullish.

As investors.com noted, “Despite that warning, more than a dozen Wall Street analysts raised their price target on Facebook stock. The price targets ranged from a low of 390 to a high of 500.”

Ad Prices and Growth

KeyBanc Capital Markets analyst Justin Patterson characterized the current environment as “a very strong ad market,” fueled by demand for digital ads during the reopening. 

I also think that a line in the earnings report by Facebook’s CFO, David Wehner, is particularly telling: “Similar to the second quarter, we expect that advertising revenue growth will be driven primarily by year-over-year advertising price increases during the rest of 2021,” he said.

So investors should expect that Facebook’s Q3 ad volume will be similar to its levels during the last two quarters of 2020. The question is, how much higher did its prices climb last quarter? No one knows.

But that’s what investors will want to find out as the company’s revenue growth rates decelerate in Q3 and Q4. Wall Street will be keenly watching Facebook’s ad price data and ad volume in the coming quarters. The ad price and volume metrics produce the revenue numbers that drive the company’s share prices. 

Wehner,  Facebook’s CFO,  stated that the company’s ad prices should rise in Q3 and Q4. That means Facebook has a good chance of delivering strong revenue figures in Q3, as long as its price increases make up for its decelerating revenue growth. 

Facebook looks strong fundamentally, but investors have to consider other factors.

Continued Headwinds 

Big tech has been  pressured by Washington for a long time. The current administration nay look to cut big tech’s monopoly power more than the Trump administration did. 

Yet, even in a scenario in which Facebook is broken up, the changes won’t occur quickly. An article in Fast Company from late 2020 concluded that the process would take ten years

Facebook will remain controversial. It recently announced that it would require workers returning to its offices to be vaccinated. In today’s politically polarized landscape, that’s bound to further alienate the company in the eyes of many. 

But Facebook will likely continue to thrive despite its controversies.  That’s why, from a fundamental perspective, there’s little reason to bet against FB stock.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


Article printed from InvestorPlace Media, https://investorplace.com/2021/08/high-ad-prices-have-left-facebook-just-as-strong-as-ever/.

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