Top Picks 2021: Facebook (FB)

01/08/2021 5:30 am EST

Focus: TECHNOLOGY

Douglas Gerlach

President, ICLUBcentral, Inc.

The global COVID-19 pandemic hit businesses hard in 2020, and Facebook (FB) was no exception. However, the pandemic has accelerated trends that are set to benefit Facebook in the years ahead, suggests Doug Gerlach, editor of Investor Advisory Service.

Online advertising has grown into a big business. According to the IAB Internet Advertising Revenue Report of May 2020, an industry survey conducted by PricewaterhouseCoopers, internet ad spending in the U.S. was $124.6 billion for the full year 2019, up 16% over 2018.

The lion’s share of this new growth has been made possible by mobile, which now accounts for 70% of ad spending. The increasing share of mobile has further benefited social media advertising, which grew 23%, 75% faster than the rate of search, the dominant ad format of Alphabet (GOOG).

Facebook outgrew the social media category in 2019, registering a sales advance of 27%. However, advertisers cut spending significantly in response to lower economic activity in the first half of 2020 and sales grew only 11% in the second quarter.

Third quarter growth has rebounded to 22% as global economies reopened and many brick-and-mortar retailers moved their selling activity online. The company reports it saw broad growth across large vertical sectors including eCommerce, retail, and consumer packaged goods.

The Facebook app has become ubiquitous worldwide. At the end of the third quarter 2020, Facebook had monthly active users of 2.74 billion, a staggering 35% of the world’s total population of roughly 7.8 billion. We expect user growth to slow but to remain positive in the years ahead.

The company has also been busy building and integrating Instagram (photo and video sharing), Messenger and WhatsApp (instant online communications), and Oculus (virtual reality) with Facebook.

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Integrating these applications is a sound strategy as users can more easily utilize the strengths of each seamlessly while Facebook can provide advertisers with common ad tools to target customers regardless of application.

Facebook has several avenues to increase sales even while user growth slows. There is considerable room to grow Facebook (the application) average revenue per user (ARPU), both domestically and abroad. Facebook’s ubiquity supports additional services.

The pandemic has accelerated the growth of e-commerce as a share of U.S. retail sales. Over 200 million businesses are now using the firm’s free tools to create virtual storefronts and communicate with their customers.

Shopping on Facebook applications creates the opportunity for higher priced advertising and is a natural way for the firm to introduce a payments product that can generate fee revenue.

Analysts project annual earnings growth of 20%. We are more conservative and forecast 17%. Five years of 17% earnings growth and a high P/E of 33.5 could generate a stock price as high as $644, representing 18.7% annualized returns.

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