Can improving ad spend lift Facebook’s share price?

Although Facebook’s [FB] share price surged to an intraday high of $304.67 on 26 August — up 122.2% from its 52-week low of $137.10 on 18 March — the stock has failed to recover the gains it shed during the September tech rout. As the social media giant gets ready to report its third-quarter earnings on 29 October, what can investors expect from Facebook’s share price?

At the close of trading on 27 October, Facebook’s share price of $283.29 was down 6.3% from its 2 September close of $302.50. It was, however, still up 38% since the start of the year.

Facebook’s disappointing share price performance since the start of September was due to a wide range of headwinds, which led the stock to decline 10.6% throughout the month.

Part of the issue lies in concerns that tech stock valuations are not sustainable. Investors are also diversifying and reducing their exposure to big tech in order to reduce the risk to their portfolio.

There’s also an ongoing antitrust case that Facebook is facing. In September, the US Federal Trade Commission announced it was preparing a lawsuit “that would challenge the company’s dominant position in social media”, as reported by The Wall Street Journal. 

Digital ad spend woes

Facebook delivered a surprise earnings beat in the second quarter. Total revenue was $18.6bn, up 11% year-over-year, while earnings were up 98% from $0.91 in the year-ago period at $1.80 per share. The results far surpassed the consensus analyst estimates of $17.4bn in revenue and $1.39 earnings, based on Refinitiv data.

It had been widely assumed that the performance in Facebook’s advertising revenue would be underwhelming due to the limited retail operations amid the coronavirus pandemic. However, its advertising segment rose 10% year-over-year to $18.3bn during the quarter, accounting for 97% of total revenue. In the first quarter, the company had posted advertising revenue $17.4bn, marking a 17% rise from the first quarter of fiscal 2019. 

What made the better-than-expected advertising revenue growth in the second quarter so impressive was the fact that Facebook had been subject to a boycott over its failure to deal with hate speech posted on its platform. 

On the earnings call, Dave Wehner, Facebook’s CFO, said that the advertising spend rate seen in the first few weeks of July was on a similar level to the second quarter’s growth rate of 10%. “We expect our full quarter Q3 year-over-year ad revenue growth rate to be roughly similar to this July performance,” he said.

“We expect our full quarter Q3 year-over-year ad revenue growth rate to be roughly similar to this July performance” - Dave Wehner, Facebook’s CFO

Meanwhile, analysts expect Facebook to report a decline in earnings growth with higher revenue in the upcoming quarter. According to Zacks, ad revenue is expected to be $19.43bn, which would mark an increase of 11.7% from the year-ago quarter.

Revenue is set to grow 12.2% to $19.81bn, while earnings is pegged to fall 9% $1.39. If the company beats expectations again, then the share price is bound to jump in the near-term. If it misses, it could tumble. 

Ad spend set to recover in Q3

Beyond the third-quarter earnings report, analysts believe Facebook is set to profit from the long-term growth in digital advertising. Data from Statista indicates that global digital advertising sales are expected to grow to $517bn by 2023. 

“We are bullish on the ad names into Q3 results given a continued ad recovery through Q3 and a strong outlook for Q4 based on our industry conversations,” Deutsche Bank’s Lloyd Walmsley wrote in a note to clients, as reported by Barron’s.

“We are bullish on the space into 2021, where a continued cyclical recovery and easy comps will drive accelerating growth and margin recovery, with potential for more share gains across online advertising.” 

“We are bullish on the space into 2021, where a continued cyclical recovery and easy comps will drive accelerating growth and margin recovery, with potential for more share gains across online advertising” - Deutsche Bank analyst, Lloyd Walmsley

On 12 October, Walmsley gave a number of big tech stocks a boost. He reiterated a buy rating for Facebook and raised his price target from $305 to $325.

Other analysts seem to be in agreement that Facebook is a strong long-term investment too.

Out of the 46 ratings available on MarketBeat, one analyst has rated the stock a strong buy, 40 rated the stock a buy, four a hold and one is a sell. The consensus price target is $285.43.