With 2.8 billion monthly active users, a meaningful fraction of the global population uses Facebook (ticker: FB) or one of 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 fourth-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. 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 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 fourth-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 11% year over year to 1.84 billion on average. Meanwhile, Facebook’s monthly active users, or MAUs, increased by 12% through the end of 2020, finishing the year at 2.8 billion.
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 fourth quarter, with DAP increasing 15% year over year to 2.6 billion people, while MAP increased 14% to 3.3 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 fourth quarter, Facebook’s revenue from advertising grew 31% year over year, while earnings per share rose to $3.88 from $2.56 in the same quarter last year — nearly a 52% increase.
While advertising revenue did account for 96.8% of Facebook’s revenue last quarter, the remaining 3.2% shouldn’t be overlooked, especially going forward. The company’s gradual move into virtual reality got a big boost in the fourth quarter as Facebook’s $299 Oculus Quest 2 VR headset benefited from being the most widely available and affordable VR headset. The business segment that includes the Oculus Quest 2, named simply “Other,” rose 156% year over year.
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 fourth-quarter earnings reflect the company’s continuing popularity. That’s not to say there aren’t any concerns facing Facebook, some of which became more visible in the most recent quarter.
Cons of Buying Facebook Stock
One of the more meaningful developments in the most recent earnings call was the declaration from Zuckerberg, who is Facebook’s CEO, that Apple ( AAPL) was increasingly operating as one of the company’s biggest competitors. Apple, which just announced earnings, now has an active install base on its iPhones of more than 1 billion devices.
The company warned that Apple’s next software update, iOS 14, may have a detrimental impact on its business as Apple’s new privacy policies limit Facebook’s ability to target advertising. Zuckerberg said “the moves clearly track their competitive interests,” on the call, directing attention toward Apple’s grip over the mobile market. That’s an important comment because it could ultimately be meant to drum up regulator interest in antitrust concerns surrounding Apple, which Facebook is also dealing with.
Although 2020’s economic uncertainty didn’t result 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.
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 declined from 196 million the quarter before to 195 million in the U.S. and Canada in the fourth quarter.
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. A growing chorus of lawmakers, on both sides of the aisle, is calling for the repeal of Section 230, a piece of legislation providing civil liability shields to internet companies hosting third-party content. It’s important protection for companies such as Facebook, Twitter ( TWTR) and Google, which have sought to reap the rewards of hosting third-party content without bearing responsibility for legal downsides that traditional publishers have long had to cope with.
Bottom Line: Should You Buy Facebook Stock?
A few cons are 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 keeping much of 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 positive, given the company’s heavy concentration in advertising.
Although it seems increasingly unlikely that Facebook can avoid antitrust scrutiny, and Apple is indeed a meaningful competitor these days, Facebook remains a stock to reckon with and is a must-own for long-term growth investors.
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