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How will declining advertising revenue affect Facebook’s share price?

While more people are likely to be spending extra time online during lockdown, Facebook’s [FB] share price hasn’t been immune to the coronavirus crisis.

On 28 April, Facebook reported its revenue for Q1 2020 at $17.74bn, a rise of over 17% year-over-year from $15.08bn in the same period a year ago. Meanwhile, earnings per share were $1.71, up from $0.85 a share in the first quarter of fiscal 2019. The following day Facebook’s share price rose 6%, a trend that has continued since.

Although Facebook surprised analyst expectations of $1.75 EPS on revenue of $17.41bn, the quarter was the slowest growth period the company had experienced since going public in 2012. It was also a poor quarter for share price performance, as the share price closed down 18.7% for the first quarter.

The slowdown in growth is due to advertising budgets being slashed. In its earnings release, Facebook withdrew guidance for the second quarter and full-year “due to the increasing uncertainty in our business outlook”, according to a statement. 

 

 

Flat advertising

Instead, the company provided a snapshot of how it had performed in the few weeks between the end of the first quarter and the earnings update. In the first three weeks of April advertising revenue had been flat year-over-year, compared to a 17% year-over-year increase for the first quarter.

Analysts are split on the impact the slowdown in advertising revenue could have on the company’s short-term prospects.

Baird analyst Colin Sebastian said that digital media is under pressure: “Budgets are unlikely to recover meaningfully until closer to the seasonally important fourth quarter.” 

In contrast, Jefferies analyst Brent Thill said in his note that digital advertising platforms, including Facebook, Google [GOOGL] and Amazon [AMZN] have been underestimated: “What was consistent across these [latest quarterly] earnings reports is that, during a lockdown, advertisers spend most on platforms with best in class measurement and high-engaged audiences.”

Thill’s view is that, yes, advertising spending might be slowing down, but platforms such as Facebook “will be best positioned to continue gaining share.”

“What was consistent across these [latest quarterly] earnings reports is that, during a lockdown, advertisers spend most on platforms with best in class measurement and high-engaged audiences” - Jefferies analyst Brent Thill

 

Ahead of the technology market

Looking ahead, there are reasons for investors to be positive. Facebook’s share price has gained 37.4% from 31 March to 27 May close, performing better than the broader technology market. By comparison, the NASDAQ 100 Technology Sector Index has gained just over 20% and the S&P 500 17% in the same period.

37.4%

Facebook's share price rise March 31 to May 27

  

Facebook has made recent strategic plays that could work in its favour. On 15 May it was announced that the social media giant will acquire Giphy — the reported $400m makes it the company’s fifth-largest acquisition after WhatsApp, Oculus, Instagram and LiveRail. It plans to integrate Giphy’s library of GIFs into Instagram along with other Facebook apps. 

The caveat, however, as Evan Niu writes in the Motley Fool, is that the deal will “likely intensify the ongoing antitrust scrutiny surrounding Facebook, which has garnered criticism due to its overwhelming market power.”

On 24 April Facebook launched Messenger Rooms to rival video communications company Zoom [ZM], and its stock rose by 2.6% on the day of the announcement. Zoom’s stock, meanwhile, fell by 6%, having risen 12.5% the day before to a then-all-time closing high of $169.09. 

The social media giant has also just launched Shops — online stores for Facebook and Instagram that will allow users to browse products and buy directly from a business page or profile. Facebook’s vice president of ads and business platform Dan Levy said the company would take a small percentage of each sale, adding that most of the monetisation will be in the advertising revenue generated. 

 

Market Cap$647.488bn
PE ratio (TTM)31.18
EPS (TTM)7.29
Quarterly Revenue Growth (YoY)17.60%

Facebook share price vitals, Yahoo Finance, 29 May 2020

 

Convenience is king

At a time when people are in lockdown and physical stores are shut, Facebook Shops could prove to be a winner for the company. Even once restrictions have been lifted, many people may prefer the ease and convenience of shopping via their smartphones. 

Facebook Shops can be integrated with Shopify [SHOP], which is expected to benefit from the partnership and saw its stock rise since the announcement on 19 May. 

“There's been a lot of concern in the disruptive technology arena lately that giants like Facebook would come in and try to steal the thunder of smaller up-and-coming players like Shopify. At least with Shops, though, investors can see that there's an alternative that involves companies working more closely together to offer customers the best of both worlds,” writes Dan Caplinger in the Motley Fool

“There's been a lot of concern in the disruptive technology arena lately that giants like Facebook would come in and try to steal the thunder of smaller up-and-coming players like Shopify. At least with Shops, though, investors can see that there's an alternative that involves companies working more closely together to offer customers the best of both worlds" - Dan Caplinger

 

Following the launch of Shops, Facebook’s share price hit an all-time intraday high of $231.34, closing at $229.97 on 20 May. The share price’s previous high of $223.23 was set back in January and it had fallen to a 52-week low of $137.10 during the market sell-off. 

There are currently 46 Wall Street analysts ratings available for Facebook, according to MarketBeat data. Of these, only one is a sell, three a hold, 41 a buy and one a strong buy. The consensus share price target is $243.12, representing a 6% uptick on 27 May’s close.

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