After a stellar rally since the market correction in March 2020, social media giant Facebook Inc. (FB) has been in reverse gear over the past six months. The stock has declined 9.3% over the past six months, 6.8% year-to-date, and 8.4% over the past month. Several developments, primarily, Apple, Inc.’s (AAPL) new privacy changes and recent points of contention with the Australian government, have led to the stock’s decline.
FB recently blocked Australian news services from advertising on its platform following the Australian government’s imposition of a ‘News Media and Digital Platforms Mandatory Bargaining Code,’ which requires FB to pay publishing houses directly for news posts on the platform. However, the company has since reversed its decision and is now renegotiating the terms of the code with Australian authorities.
On the privacy front, FB has launched a new advertisement campaign, “Good Ideas Deserve to be Found” just as Apple is gearing up to make privacy changes. AAPL’s new App Tracking Transparency policy of asking user permission to track information is expected to hurt FB’s core ad business significantly. This has provoked a strong pushback from FB.
FB is one of the biggest tech companies in the world, with a huge influence on the social media industry. As the owner of some of the largest social media platforms along with its vested interest in the technology and internet connectivity segments worldwide, the company is expected to make a smooth comeback.
Here’s what could shape FB’s performance in 2021:
Impressive Growth Estimates
Consensus EPS estimates indicate a 38% year-over-year rise in the fiscal first quarter (ending March 2021), a 40% rise in the next quarter, 12.3% rise in 2021, and at a rate of 21.5% per annum over the next five years. Analysts expect the company’s revenues to rise 32.5% in the current quarter, 45.4% in the fiscal second quarter (ending June 2021) and 24.9% in the current year.
Recession Resistant Stock
FB has demonstrated significant resilience over the past year to deliver impressive gains in earnings and revenue. The company delivered robust financials lately, beating the Street’s estimates. Its total revenues have increased 22% year-over-year to $85.97 billion for the year ended December 31, 2020. This can be attributed to a 21% rise in advertising revenues, and 72% growth in revenues from its “Other” segment. Its income from operations have improved 36% versus the same period last year to $32.67 billion, while its net income rose 58% from the year-ago value to $29.15 billion. Its EPS has increased 57% year-over-year to $10.09 over this period, beating consensus estimates by a huge margin.
Investments in Its Largest Market
FB has invested $5.70 billion in India’s biggest telecommunications platform Reliance Jio. The country has the second largest internet user base in the world, after China, and is the biggest platform for WhatsApp, with more than 340 million users. FB is currently pushing for rapid digitization of its biggest market and is expected to profit significantly from widespread internet connectivity across the rural areas of the country. The company aims to provide internet access to more than 60 million SMEs in India through this partnership. Also, Reliance Jio’s latest online grocery delivery venture JioMart, should take off soon given its integration with FB’s WhatsApp.
Consensus Price Target and Ratings Reflect Potential Upside
FB is currently trading 16.4% below its all-time high of $304.67, which it hit on August 26, 2020. Analysts expect FB to hit $338.42 soon, indicating a potential upside of 28%. It has an average broker rating of 1.39, which indicates favorable analyst sentiment. Of 52 Wall Street analysts that rated the stock, 19 rated it Strong Buy, and 27 rated it Buy.
Favorable POWR Ratings
FB has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
It has an A grade for Quality, and a B grade for both Momentum and Sentiment. This is justified, given the company’s sturdy financials and worldwide market reach. The company’s trailing 12-month gross profit margin of 80.58% is 66.1% higher than the industry average48.52%. Also, its trailing 12-month net income margin, levered free cash flow margin and ROE values of 33.9%, 18.62% and 25.43% compare favorably with the respective industry averages.
There are several other stocks in the Internet industry with an overall rating of A or B. Click here to view them.
FB has been actively working to regain momentum in the equity markets, from extensive talks with Australian governments to launching campaigns to safeguard its interests in data tracking for its targeted advertising operations. While the company is currently facing antitrust allegations for monopolizing the social media space, it is drawing references from the Department of Justice vs. Microsoft Corporation (MSFT) case to fight the antitrust lawsuit. If successful, FB could get out of the antitrust charges with a mere slap on the wrist, as seen in the Microsoft lawsuit in 1998.
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FB shares rose $0.05 (+0.02%) in after-hours trading Friday. Year-to-date, FB has declined -5.69%, versus a 1.73% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...
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