With more than 2.7 billion monthly active users, a number of the world’s population uses Facebook (ticker: FB) or its products. Among the six most popular social media platforms in the world, Facebook owns three: WhatsApp, Instagram and, of course, Facebook itself.
With the pandemic continuing to rage across the globe, people are turning to Facebook to stay connected with their loved ones. Considering these factors in Facebook’s favor, it should come as no surprise that the company fired on all cylinders last quarter, beating third-quarter earnings and revenue expectations.
So is Facebook a good stock to buy? Let’s take a look at some of the pros and cons of Facebook stock.
Facebook Stock at a Glance
The story of Facebook is a familiar one by now: A brilliant young Harvard student named Mark Zuckerberg created a website in his dorm room in February 2004 and only allowed Ivy league students access. From there, he watched his creation explode in popularity. By 2007, Facebook garnered a valuation of $15 billion; and by 2010, it was worth $41 billion. When the company went public in May 2012 at $38 a share, it was worth a staggering $104 billion.
The company had more than 1 billion monthly active users by December 2012. But even more importantly, Facebook acquired Instagram for $1 billion in August 2012, which at the time had a little more than 100 million registered users. Today the platform has well more than 1 billion and counting. Instagram’s focus on photographs and mobile users not only proved prescient but also paired well with Facebook’s growing mobile base: In July 2019, 94% of Facebook’s advertising revenue came from mobile users.
Finding up-and-coming companies with services that complement its own is an effective strategy for Facebook. Following its purchase of Instagram, FB acquired WhatsApp in 2014 for $19 billion. Back then, WhatsApp was one of the fastest-growing companies in the world, and Facebook was happy to not only gain an incredibly popular new service but also remove WhatsApp as a competitor for Facebook Messenger.
This too would prove to be a prescient move for Facebook and one that worked out well for the company and its family of apps. In fact, according to App Annie, the four most downloaded apps in the world between 2010 to 2019 were Facebook, Facebook Messenger, WhatsApp and Instagram, in that order.
But does a company as big and as popular as Facebook still have room to grow?
Pros of Buying Facebook Stock
According to its third-quarter earnings announcement, the largest social media company in the world continued to grow larger, with Facebook’s daily active users, referred to as DAUs, increasing 12% year over year to 1.82 billion people as of Sept. 30. Meanwhile, Facebook’s monthly active users, or MAUs, increased by 12% as well to 2.74 billion as of Sept. 30.
While Facebook doesn’t break out specific user numbers for Instagram, WhatsApp and Facebook Messenger, it does consolidate user numbers for those services, along with Facebook itself, in its family daily active people, or DAP, and family monthly active people, known as MAP, measurements. Both enjoyed a strong third quarter, with DAP increasing 15% year over year to 2.54 billion people, while MAP increased 14% to 3.21 billion people.
These numbers are all-important to Facebook’s lifeblood: advertisers. Facebook relies on advertising for revenue, and to convince advertisers to spend money, Facebook must illustrate that it can continue to bring in new users and keep them on its platforms. In doing so, the company collects more data on those users, which it can then pass along to advertisers to help them target exactly which customers their ads will be most effective with. With its user count continuing to increase, Facebook is sitting pretty, but reliance on advertising can be a double-edged sword (more on that later).
Along with this impressive growth in users came commensurate increases in revenue and earnings, both of which beat analyst expectations. In the third quarter, Facebook’s revenue grew 22% year over year, while earnings per share rose to $2.71 from $2.12 in the same quarter last year — a 28% increase.
While advertising revenue did account for 98.8% of Facebook’s revenue this quarter, the remaining 1.2% shouldn’t be overlooked, especially going forward. The company’s gradual move into virtual reality is getting a big boost in the fourth quarter as Facebook’s $299 Oculus Quest 2 VR headset represents arguably the first widely available, affordable VR headset that could help mainstream the technology. It can’t hurt that the company is making small bets on the side, and the company even noted in its release that early Oculus Quest 2 orders have been strong.
The global pandemic has made it clear that while only strong companies will survive, essential companies will thrive. Facebook has been one of those essential companies since the virus began to spread around the world in early 2020, and this quarter’s earnings reflect the company’s continuing popularity. But there are still clouds brewing over Facebook, and some of them became more visible in the most recent quarter.
Cons of Buying Facebook Stock
Facebook has never shied away from the spotlight but hasn’t always walked away from it looking good. In 2016, the company came under intense scrutiny for how it handled advertising and news feeds during the presidential election. In 2018, Facebook’s image took another beating when it was revealed that Cambridge Analytica had utilized data from its users without their consent, sparking a #DeleteFacebook campaign.
The most recent hashtag of concern for investors, #StopHateForProfit, attracted negative media attention in recent months. Beginning in early July, big brands including Unilever ( UL), Verizon Communications ( VZ) and Starbucks Corp. ( SBUX), among others, announced they would pull their advertisements from Facebook until the company took a firmer stance against hate speech on its platform.
As seen in third-quarter results, those efforts didn’t materially weaken advertising growth, with ad revenue still surging 22%.
Although 2020’s economic uncertainty hasn’t yet resulted in a decline in Facebook’s business, the risk of some financial fallout if a global economic recovery isn’t swift is still a meaningful threat. Along with Alphabet ( GOOGL, GOOG), Facebook controls the majority of the digital advertising market in the U.S., which could be severely impacted if the current recession lasts longer than anticipated. This uncertainty is one reason why FB didn’t offer fourth-quarter earnings guidance in its latest report.
One downside to FB stock that was already apparent in last quarter’s results is the company’s stagnation in the U.S. and Canada — the most lucrative market on a per user basis. Daily active users actually declined from 198 million the quarter before to 196 million in the U.S. and Canada in the third quarter. What’s worse, the company expects a declining or flat user base in the fourth quarter as well.
Lastly, antitrust scrutiny remains a risk, especially in the context of the Department of Justice’s antitrust lawsuit against rival Google, the largest Big Tech lawsuit since the one against Microsoft ( MSFT) roughly two decades ago.
Bottom Line: Should You Buy Facebook Stock?
There are a few cons working against Facebook, but its biggest pro is how well-established it is. Size matters in the world of social media, and whichever company can keep the most eyeballs on its homepage wins advertising dollars, even if it doesn’t win the advertiser’s hearts. Facebook has taken a lot of missteps in recent years, but the steps it took early in its history to establish itself as the most dominant social media company in the world will insulate it from all but the most negative bad press.
Users will probably still give Facebook a “like” — which is exactly why investors should as well, at least in the short term. Facebook is an essential business that is keeping the world connected during a global pandemic. Whether advertisers like it or not, the company’s popularity will keep them coming back and lining Facebook’s pockets. Though near-term headwinds may slow the company’s growth, at least in North America, Facebook isn’t going anywhere anytime soon, and global user growth numbers are still impressive. Its attempts to diversify into VR are also worthwhile and potentially positive, given the company’s heavy concentration in advertising.
In the longer term, however, the trends seem to be working against Facebook. A history of acquiring upstart rivals and folding them into the Facebook family (or simply copying their business, a la Snapchat) means that it’s unlikely the company will let any newcomers sneak up on it. But Big Tech rivals like Alphabet with YouTube and Amazon.com ( AMZN) with Twitch continue to attract large, young audiences that Facebook can’t ignore. It also seems less and less likely that lawmakers will ignore Facebook’s antics, and only time will tell if they bring the hammer down on the world’s largest social media company.
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Update 10/30/20: This story was published at an earlier date and has been updated with new information.