FB stock has been bouncing back from a 20% sell-off ahead of what's expected to be a strong Q4 earnings report after Wednesday's close. Facebook's business has been on a major roll, overcoming Covid economic weakness and a high-profile boycott in 2020. Now the FANG stock has a host of new worries to overcome — government antitrust cases, a more hostile political landscape, and a new privacy measure from Apple that could hurt Facebook's mobile advertising cash cow. Yet Wall Street is betting that the worst has been discounted.
Bad news tends to follow good news for Facebook stock. Yet after a string of negative developments, strong business trends usually right the ship.
Antitrust cases can take years to play out, and it's not clear that the backlash against Facebook from the right will be more damaging that last summer's boycott from the left. So is now a good time to buy FB stock?
Facebook Faces Revenue Hit From Apple Privacy Changes
Facebook has warned that ongoing privacy regulation and changes in mobile operating platforms, notably Apple's iOS 14, could impede ad targeting and weigh on ad pricing.
Apple's policy will require Facebook and other apps downloaded through the App Store to provide users a prompt, allowing them to opt in or out of tracking their activity across third-party sites.
"It doesn't do a local wedding planner any good to reach people who aren't planning a wedding," wrote Dan Levy, Facebook vice president of ads and business products. "By dramatically limiting the effectiveness of personalized advertising, Apple's policy will make it much harder for small businesses to reach their target audience, which will limit their growth and their ability to compete with big companies."
Small businesses could see a cut of over 60% of website sales from ads, Levy wrote. However, he added that Facebook doesn't expect proposed iOS 14 changes to cause a full loss of personalization "but rather a move in that direction over the longer term."
What will the privacy change mean for Facebook revenue in Q1, 2021 and 2022? That's the key signal investors are waiting for.
Evercore ISI analyst Kevin Rippey wrote in a Jan. 21 note that analyst estimates for the Q1 revenue hit from Apple's privacy change appear to range from low-single-digit percentages to a worst case near 10%. Rippey raised his FB stock price target to 355 from 320, contending that the consensus estimate for Q1 revenue likely overstates the ad-targeting revenue drag by several hundred basis points.
On Tuesday, Deutsche Bank analyst Lloyd Walmsley hiked his FB stock target to 350 from 325, saying the upcoming Facebook earnings report is "likely to be a clearing event." Walmsley thinks the near-term hit to ad revenue may be bigger than investors expect. However, he expects it will be short-lived, with 2022 estimates largely unaffected.
Facebook Faces Backlash For Silencing Trump
North American usage trends will be another focus of the Q4 earnings call.
Facebook suspended President Trump's account indefinitely after his supporters overran the Capitol to disrupt certification of Joe Biden's victory. Early on Jan. 7, CEO Mark Zuckerburg wrote that Trump had chosen "to condone rather than condemn the actions of his supporters." Subsequently, Facebook blocked all "stop the steal" content.
Bank of America analyst Justin Post wrote on Jan. 11 that Facebook had 33 million Trump followers, raising the possibility of some customer churn and "engagement risk" in Q1. He also expects legislation to be proposed that would require higher spending to review user content.
Still, Post said he saw higher risk for Twitter than Facebook and maintained buy ratings for both stocks.
FB Stock Analysis
Since hitting an all-time high of 304.67 on Aug. 26, FB stock has been mired in a consolidation going back to late August. As selling pressure intensified, Facebook stock undercut its 200-day moving average on Jan. 14 for the first time since late April. However, FB stock bounced 13% over the next six sessions, reclaiming its 50-day average on Jan. 22.
FB stock is now 8% below a 304.77 buy point, 10 cents above its Aug. 26 high, according to a MarketSmith analysis. If shares can recover, investors could use 297.48 as an early entry, just above the Nov. 5 short-term high. For aggressive investors, FB stock is trading right around a trend line running from the Nov. 5 high. However, buying a stock ahead of earnings can be risky. IBD recommends an options strategy to limit risk around earnings.
After a stellar first eight months of 2020, FB stock's performance has clearly dimmed. Facebook stock has retreated since the Dec. 9 antitrust filings while the overall market has moved higher. Apple's privacy change, the Democrats' Senate takeover and Trump's suspension all have weighed on investor sentiment.
The relative strength line, the blue line in the charts provided, fell from a record high in August to a 9-month low. The RS line indicates that FB stock, amid ups and downs, has basically only matched the S&P 500's performance since August 2018.
Government Aims To Break Up Facebook
On Dec. 9, the Federal Trade Commission and a group of state attorneys general filed separate antitrust cases alleging that Facebook's acquisitions of Instagram and WhatsApp were anticompetitive in nature and intended to bolster its monopoly position.
The stakes in the Facebook antitrust suits are immense. The FTC wants Facebook broken up to create the same level of competition that would have existed without the Instagram and WhatsApp mergers. On top of that, Facebook should provide ongoing resources to ensure that the competition is robust.
The government suits provide an evidentiary trail supporting their allegation that Facebook was intent on buying companies that appeared to have the best chance of becoming serious competitors.
Facebook general counsel Jennifer Newstead countered that regulators let its 2012 Instagram and 2014 WhatsApp deals move forward "because they did not threaten competition." She argues that the mergers were "procompetitive." For example, Facebook turned WhatsApp from a subscription service into a free service, challenging telecom operators' text-messaging fee structure.
After Facebook put billions of dollars and millions of hours into those companies, the FTC "wants a do-over," Newstead wrote in a statement. "Now the agency has announced that no sale will ever be final, no matter the resulting harm to consumers or the chilling effect on innovation."
Wall Street Analysts Shrug Over Facebook Antitrust Suits
So far analysts are largely dismissing the possibility of a breakup. UBS analyst Eric Sheridan only sees a high bar for future Facebook acquisitions and reiterated his 330 price target with a buy rating. KeyBanc analyst Justin Patterson predicted that Facebook would face another fine, rather than a breakup.
"We continue to believe the likelihood of a breakup of FB is low (judges are typically loathe to undo transactions) and the sum of parts of the various segments is likely similar or greater than FB current valuation," Raymond James analyst Aaron Kessler wrote in a December note.
Could analysts be wrong about the outcome? The challenge for the government plaintiffs will be to prove that the mergers didn't only reduce competition, but that they were actually harmful. However, if they succeed by highlighting reduced privacy for users, higher prices for advertisers, and unfair competition against smaller competitors, a breakup might be the logical structural remedy. Facebook reportedly tried to avert an antitrust suit by offering to license access to its code as a way of enabling new competition, but regulators weren't swayed.
Still, the Justice Department's antitrust case against Google that was filed in October won't go to trial until September 2023. If the Facebook case gets a similar timetable, do investors really need to start worrying now?
Facebook Earnings
The social media giant easily surpassed third-quarter earnings estimates. It posted an adjusted profit of $2.40 per share, up 13% from a year ago, excluding a 31-cent tax benefit. Revenue grew 22% to $21.5 billion. That topped $19.8 billion estimates and doubled Q2's 11% growth rate.
Facebook stock initially traded lower after the late-day Oct. 29 earnings report. Investors appeared to focus on a slight decline in daily active users in the U.S. and Canada to 196 million from 198 million.
Facebook had previously warned that a spike in use of the social media app that occurred early in the pandemic would moderate as life normalized. And it began to over the summer. The trend of flat or slightly lower daily and monthly active users will likely continue in Q4, Facebook said. Yet, despite that headwind to growth, Facebook revenue actually accelerated through Q3.
In late July, management had said that Facebook revenue was growing about 10% from a year ago early in Q3. However, that is far below the 22% growth rate for the full quarter.
"We expect Q4 growth to be higher than the reported growth rate in Q3, because obviously we saw August and September being stronger," CFO Dave Wehner told analysts.
It's not clear how much Facebook revenue growth in July was held back by a high-profile ad boycott targeting its perceived tolerance of racially offensive speech. Management has since taken steps to address that concern.
The bigger picture is that Facebook advertisers, a group which has grown to 10 million businesses, are using the social media site to connect with prospective customers like never before.
Q3's 22% growth came as ad impressions served across Facebook properties grew 35% from a year ago. Meanwhile, the average price per ad decreased 9%. That latter figure was a big improvement over Q2. That quarter the average purchase price through Facebook's ad auctions fell 21%.
Facebook Earnings Estimate
For Q4, analysts expect Facebook earnings of $3.18 a share, up 24% vs. a year earlier. Revenue should show a 25% gain to $26.34 billion.
Join IBD experts as they analyze leading stocks in the market rally on IBD Live.
Facebook's Diem Dollar
Facebook's entry into the cryptocurrency space, first announced in mid-2019, looked all but dead after Fed Chair Jerome Powell and international regulators raised serious doubts about the plan. Yet the company has quietly moved forward with an approach considered somewhat less controversial. On Dec. 1, the Libra Association behind Facebook's cryptocurrency renamed itself the Diem Association to go with the renamed Diem Dollar cryptocurrency. Instead of its original plan for a stablecoin with a value pegged to a basket of currencies, Facebook now plans a coin pegged only to the dollar. The company hopes that change, along with a new focus on anti-money laundering, will meet the demands of regulators.
The Financial Times reported that Facebook is hoping to launch its Diem cryptocurrency in January in the U.S. and some Latin American countries. Facebook still needs some state approvals for its Novi digital wallet. Additionally, the Diem cryptocurrency plan needs approval from Switzerland's Financial Market Supervisory Authority. That's where the Diem Association is based.
Yet just as Facebook revived its cryptocurrency plan, a group of House Democrats introduced the Stable Act. The bill would require stablecoin issuers such as Facebook to get a banking charter. It also would provide for a six-month review by the Fed and FDIC before issuance.
Facebook Business Developments
Facebook still has plenty of untapped potential that has Wall Street excited, apart from its cryptocurrency venture. In August, it began taking on TikTok with the newly launched Instagram Reels. And the long-term effort to monetize the massive WhatsApp user base is just getting started.
In a Jan. 22 note, Oppenheimer analyst Jason Helfstein touted Facebook's e-commerce momentum, calling Facebook Shops a $25-billion to $50-billion opportunity.
Facebook has announced 2021 capital spending of $21 billion-$23 billion, driven by investments in data centers, servers, network infrastructure and office facilities. Some of the growth vs. a $16 billion estimate reflects delayed construction due to the pandemic. Still, RBC Capital Markets analyst Mark Mahaney wrote that the implied 31%-44% increase shows Facebook is "investing aggressively in innovation from a position of strength."
Release of the $300 Quest 2 virtual reality headset should provide a boost to Q4 revenue. "Preorders have outpaced the original Quest preorders by more than 5x and have surpassed our expectations," Zuckerberg said.
How Much Is FB Stock Worth?
Facebook stock has a market cap of $793 billion. That makes FB stock the sixth-most-valuable company on the S&P 500 index, behind Apple, Microsoft, Amazon, Google-parent Alphabet and Tesla stock.
Why This IBD Tool Simplifies The Search For Top Stocks
FB Stock: Is It A Buy?
Wall Street analysts think this FANG stock still has a long growth runway and provides unmatched value to advertisers. Facebook has proved its mettle during an unprecedented economic downturn.
Facebook stock boasts a solid 88 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. Yet investors who want to bet on Facebook should wait until it again demonstrates its resilience by reaching a proper buy point.
Bottom line: FB stock is not a buy right now.
Check out IBD Stock Lists and other IBD content to find dozens of the best stocks to buy or watch. If you want to invest in a large-cap stock, a comprehensive selection of articles is here. The IBD Big Cap 20 index offers a selection of the very best large-cap stocks.
And be sure to read IBD's after-the-close The Big Picture column each day to make sure growth investors have a green light.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of financial markets and economic policy.
