FB stock gapped up to a record high in Friday stock market action, regaining a $1-trillion valuation with an assist from strong Snap earnings. Expectations already were high for Facebook‘s (FB) Q2 earnings report due after the close on Wednesday.
The Q2 earnings report is a pivotal one for Facebook. Investors will weigh the strength of digital advertising against the negative impact from Apple’s iOS update, which has hurt Facebook’s ability to track users’ activity across third-party sites.
FB Stock News
On Monday, Mizuho analyst James Lee hiked his FB stock price target to 450 from 400, keeping a buy rating. Lee downplayed the impact of Apple’s privacy change and said he expects upward revisions to the consensus of 34% full-year revenue growth.
The surest path for easing concerns over tracking user activity is to shift commercial transactions sparked by online advertising to within Facebook’s own properties. Last week saw good news on that score, as Gap announced that Instagram users can now shop and pay for Old Navy and Athleta products “without ever having to leave the app.” In coming months, Gap and Banana Republic also will launch shopping on Instagram, the company said.
On July 19, Wedbush analyst Ygal Arounian wrote that 75% of firms that participated in a Wedbush survey plan to increase their digital ad spending over the next six months. Facebook and Google remain dominant, he wrote.
Yet Arounian found that advertisers are seeing a reduced return on investment from digital ads after an Apple (AAPL) privacy update required users to opt in to allow Facebook and other apps to track their activity across the web. He also noted that advertisers are responding by diversifying their spending across platforms, with Facebook seeing the biggest impact.
FTC Court Filing Delayed
The FTC got an extension until Aug. 19 to amend its antitrust suit, which is aimed at undoing Facebook’s 2012 Instagram and 2014 WhatsApp acquisitions. In dismissing the complaint, U.S. District Judge James Boasberg said that the FTC had failed to offer any clear evidence that Facebook has a social networking monopoly. He faulted the government’s “vague” assertion of a 60%-plus market share, with no explanation of how that figure was derived.
Facebook also faces some risk from a a series of Big Tech antitrust measures narrowly approved by House Judciary Committee on June 23. One measure requiring data portability and interoperability, which Cowen Washington Research Group analyst Paul Gallant called among the “mildest” of the bunch, passed by a 25-19 margin, with three California Democrats opposing it.
Exactly what the bill would do would be up to the Federal Trade Commission to interpret. Yet industry observers say it could require letting users of Snap (SNAP), Twitter (TWTR) and other sites connect with Facebook users. It also might require data-sharing, which could erode Facebook’s ad-targeting advantage.
However, amid intraparty infighting over the package, House Democratic leadership has signaled that the bill will have to be changed before it advances to a full-House vote.
FB Stock: Bull Case
The big picture is that Facebook advertisers are using the social media site to connect with prospective customers like never before. The group of advertisers has grown to more than 10 million businesses from more than 8 million when the pandemic started.
The April 28 first-quarter earnings report showed revenue surging 48% to $28.1 billion, fueled by a 30% jump in ad prices. The price increase came even as the number of ad impressions served across Facebook properties grew 12%.
In the bull case, more and more businesses gravitate to Facebook, putting more of their ad dollars to work on its properties that deliver an industry-leading return on investment.
To protect and capitalize on its strong position, Facebook is innovating — and copying — rapidly. Its TikTok-like Instagram Reels is providing a new vehicle for advertising. Meanwhile, the Facebook Shops digital mall, first announced in May 2020, now has about 1.2 million active shops and more than 300 million shoppers, or at least browsers, per month, the company said on June 22.
Shops is Facebook’s big effort to bring e-commerce purchases in-house, instead of just facilitating user-advertiser connections that result in off-site purchases. Businesses can set up a single shop for customers to access on Facebook, Instagram and now WhatsApp.
Bringing “the merchant transaction onto the platform removes the need for off-platform tracking,” wrote Morgan Stanley analyst Brian Nowak. That lowers the risk of privacy-related changes and regulations that impede tracking of user activity outside of Facebook properties.
FB Stock: Not-As-Bullish Case
FB stock bears are a rarity among analysts, but the less-bullish case centers on the threat of regulation, both at home and abroad. Facebook has warned that ongoing privacy regulation and changes in mobile operating platforms could limit ad targeting and weigh on ad pricing.
The FTC wants Facebook broken up to create the same level of competition that would have existed without the Instagram and WhatsApp mergers. So far analysts are largely dismissing the possibility of a breakup. If it comes to that, analysts say the sum of Facebook parts would be worth more than FB stock. However, to the extent Facebook’s advertising prowess depends on driving more on activity within Facebook and Instagram, the implications of a breakup would become bigger.
Facebook and its Big Tech peers also could face potential headwinds from President Biden’s proposed tax hikes targeting international profits. Rising interest rates also could pinch growth stock valuations.
FB Stock Analysis
After the court ruling against the FTC came down on June 28, FB stock took off, surging 4.2% to a record closing high 355.64.
That rally capped off a strong 17-week run for FB stock, which went from laggard to leader, fueled by the impressive growth of its Shops digital mall and stellar Q1 earnings.
Still, the spark from the court ruling against the FTC propelled FB stock out of reach for new buys, more than 10% above its 50-day moving average.
On July 19, though, FB stock fell back into range with a test of its 50-day line. FB stock slipped as low as 334.59, opening a buy window.
When a leading stock bounces after testing its 10-week or 50-day average above its prior buy point — 304.77 for FB stock, according to MarketSmith — investors can seize the opportunity to pick up shares at a discount from their recent price.
The rebound from the July 19 low was fast. FB stock closed at a record 369.79 on Friday. FB stock jumped 8.4% for the week, including more than 5% on Friday in the wake of Snap and Twitter results.
FB stock’s relative strength line, the blue line in the charts provided, is close to an all-time high.
Apple Ad-Targeting Headwinds
On April 26, Apple released its iOS 14.5 update that requires Facebook and other apps downloaded through the App Store to provide users a prompt. The prompt allows them to opt in or out of tracking their activity across third-party sites.
Early data from Flurry Analytics shows that only about 5% of U.S. app users and 13% worldwide have opted into ad tracking for any apps.
Eric Seufert, who runs the Mobile Dev Memo blog, has estimated that Facebook could initially take a 7% revenue hit if only 20% of global users opt into ad tracking.
The iOS release came just two days before Facebook’s Q1 earnings call. “It’s really early” to be drawing conclusions, CFO Dave Wehner told analysts.
“We continue to be concerned about the impact that this update is going to have on the ability of small businesses to use their advertising budgets effectively. That said, the impact on our own business, we think, will be manageable.”
Wehner added that Facebook is making progress “on our own solutions to help advertisers navigate these changes.”
Opt-outs mean Facebook will know less about users’ interests, life changes and purchases.
However, CEO Mark Zuckerberg said on March 19 that Apple’s iOS ad-tracking prompt could actually be a blessing in disguise for Facebook.
He suggested that Apple’s changes could “encourage more businesses to conduct commerce on our platforms” to make the most of their internal data for advertising purposes.
How Much Is FB Stock Worth?
As of July 22, Facebook stock had a market cap of $1.05 trillion. That makes FB stock the fifth-most-valuable company on the S&P 500 index, behind Apple, Microsoft (MSFT), Amazon (AMZN) and Google-parent Alphabet (GOOGL).
FB Stock: Is It A Buy?
Facebook proved its mettle during an unprecedented economic downturn, and Wall Street analysts think this FANG stock still has a long growth runway.
Facebook stock boasts a stellar 99 IBD Composite Rating. The Composite Rating combines several key fundamental and technical factors into a single score. IBD research shows all-time stock winners often have a Composite Rating of at least 95 near the start of big runs.
It’s dangerous to bet against FB stock, even as it faces a long antitrust battle and regulatory threats, as well as headwinds from higher taxes and interest rates. Facebook has showed impressive agility with its well-timed e-commerce push. Despite lingering concern that privacy changes may dent Facebook’s advertising edge, FB stock has been solid, remaining well above its prior breakout and pushing to new highs.
Still, volatility around next week’s earnings, as well as a potential refiling of the FTC’s antitrust case, suggest Facebook is too extended from its 10-week and 50-day lines — 9%-10% — for new buys. IBD has developed an options strategy to manage earnings risk.
Bottom line: Facebook has been a big winner in 2021. But ater bouncing off its 50-day average to a record high, FB stock is no longer a buy. Investors should wait for another entry point to “like” this FANG stock again.
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