Facebook Stock Forecast: FB Looks to Snatch Google and Amazon Users

 

 

This article was written by Grant Goldstein, a Financial Analyst at I Know First

 

 

 

 

“Facebook is so ubiquitous now that it’s like another manifestation of the web itself”

– Mark Levchin

 

(Source: Wikipedia)

Highlights

  • 2018 Q1 Earnings Surpass Investor’s Expectations
  • Facebook Experiences Bullish Signs
  • The Company Goes Head to Head with Google and Amazon

Facebook, Inc. (NASDAQ: FB) is focused on connecting individuals through mobile devices, computers, and other surfaces. The company owns platforms where users could discover and learn about events and news from around the world. Through these platforms, the company has engaged in selling advertising placements. Incorporated in 2004, Facebook owns WhatsApp Messenger, Instagram, and Oculus.

Q1 Analysis

Facebook had a fantastic Q1, crushing expectations. Year over year, operating income increased by 63.78%, EPS increased by 62.26%, cash surged 91.17%, gross PP&E rose by 63.38%, and retained earnings by 52.14%. The company has seen great success in their ads, as revenue from them grew 50% YoY with mobile ads revenue being $10.7 billion. Daily active users reached 1.45 billion, an increase of 13% from last year. Facebook has shown confidence in its future as it spent $1.9 billion repurchasing stock and has been authorized to purchase an additional $9 billion. Capital expenditures hiked by 121.2% to $2.812 billion, moved by investments in data centers, servers, and infrastructure.

(Source: YCharts)

A lot of the company’s current investments are for safety, security, and privacy. After Facebook was exposed for mishandling users’ data, these are fundamental steps that the company must take in order to regain trust from the community and advertisers. Mark Zuckerberg, CEO, stated that “Over the next three years, we’re going to keep building Facebook to not only be a service that people love to use, but also one that’s good for people and good for society.” The more trust Facebook regains and builds in the community, the more revenue they will continue to see. Having the community happy is imperative if Facebook wants to sell more ads. So starting at the root of the issue will surely help add users and increase ad revenue.

(Source: Facebook)

Since earnings were so excellent, Q2 has high expectations to meet and is expected to surpass Q1 returns.

(Source: YCharts)

(Source: YCharts)

Facebook’s profit margin for Q1 showed strong signals: it increased 9.25% to 41.68%. The social media’s profit margin is much greater than its competitors, Alphabet (Google) and Twitter, who have a profit margin of 30.18% and 9.17%, respectively. Facebook’s operating income was up 63.78% while Google only saw an increase of 6.59%. Facebook’s PE ratio is low at 28.98, while Alphabet’s PE is 31.26. The low PE for Facebook suggests that the stock is undervalued; with increased revenue and profit margin for Q1, investors are wary of Facebook due to privacy issues, not for the company’s current performance.

Compared to the industry average, Facebook has performed outstandingly. Facebook’s ROA was 22.60% compared to 12.68%, and operating margin was 50.07% compared to 26.93%.

(Source: YCharts)

Although Facebook’s reputation was briefly damaged from the Cambridge Analytica scandal, their business is doing better than ever. While some larger business are pulling ads out of Facebook, more small businesses are coming in, making up the loss and then some. By the end of the year, the company is expecting to recognize revenue of $21 billion in digital ad revenue alone. Interpublic Group of Companies have predicted that global ad revenue will increase by 6.4% this year, reaching $551 billion.

As Facebook moves past the data scandal, it will see a rise in stock price. Q1 reports were outstanding and most of their ratios were better than their competitors. Keeping this up will result in Facebook growing and gaining a bigger market share.

FB has been expressing some very bullish signals. Facebook’s stock price crossed over both the 50 day (short term) and 200 day (long term) moving average (MA) on April 25th. It has since separated further from the long term MA, making the stock even more desirable. Also, the short term MA crossed over the long term MA, resulting in the “golden cross”, a very bullish sign.

(Source: YCharts)

Apple’s “Subtle” Attack on Facebook

One of Apple’s biggest concern is their customer’s privacy. Apple updated its App Store policy on June 12th to restrict all apps from harvesting the data of other apps and contacts from iPhone users. This is a threat to Facebook, who collects data for marketing and acquisition opportunities through the App Store, specifically their VPN app, Onavo. For instance, Facebook knew to acquire WhatsApp through the information given to them from Onavo. So this will surely hurt the company’s data and future acquisition opportunities. 

Facebook Hops on the Gaming Wagon

Popular websites such as Twitch and Youtube Live have shown the world that gaming live streams bring in a ton of revenue and users. Facebook has decided to jump in at a chance of a piece of the pie and has launched fb.gg. This new website gives gaming live streamers a home to stream on Facebook, allowing users to follow players and view gaming content.

(Source: FB.gg)

The main audience for video game live streams tend to be young children. Facebook wants this audience because children are more enticed to interact with advertisements, giving Facebook ads more value. Another way the company is profiting from the platform is by giving users the choice to buy “stars” for streamers. Each star cost anywhere from $1.40 to $100 and Facebook will take up to a 30% cut of all the sales.

Amazon: A Force to Not be Reckoned With

This year, Amazon looks to push advertisements across all their domains. During Q1, Amazon’s advertising revenue jumped 139%, surpassing $2 billion. According to eMarketer, Amazon will be the third largest ad player in the U.S. by 2020, with $20 billion in ad revenue.

The cloud server powerhouse is now a huge threat to Facebook. Amazon has over 100 million prime members alone and the amount of users across all of Amazon services is astronomical. The importance of this is that they have data on millions of people. Whether it’s what shows people watch or what type of food they like to order at 11 PM, their data is much more specific than Facebooks.

Not only that, but Amazon has a lot of resources at their disposal. The company has $20.52 billion in cash compared to Facebook’s mere $8.07 billion. With ownership of Amazon TV, Alexa, Twitch, and Kindle, there are locations where Amazon can collect data and place advertisements in the snap of a finger. So, as Amazon looks to grow their advertisement sector, their resources will ensure fast growth compared to Facebook.  

Amazon is also a direct competitor to Facebook’s brand new gaming page. Twitch itself has 962,000 average viewers at any given point. So, it is going to be difficult for Facebook to pull not only viewers, but content creators. The failure of Facebook’s gaming could be a huge loss for the company and upset investors.

(Source: YCharts)

Facebook Challenges Google’s Prosperous Youtube

Facebook’s Instagram, with one billion users, is taking aim at Youtube. Their brand new app IGTV (Instagram TV) will allow content creators to broadcast up to one hour long videos, available for viewing on both the IGTV app and the Instagram app. Following this announcement, Facebook’s stock rose by 2.7%.

The new Instagram experience looks to capture the magic of Youtube and move it to the mobile sphere where it is easier and more engaging to view. IGTV has the potential to take a decent chunk out of Youtube since the current monetization problem is causing relation problems between users and the website. Recently, even just mentioning a controversial topic could force your Youtube video to be demonetized, meaning content creators will receive no money from ads. Youtube deploys an algorithm to detect certain keywords that demonetize videos. Many times this algorithm has been off, hurting Youtubers income. If Facebook offers a better way for these content creators to collect their money, it will bring many creators over.

(Source: Statista)

Analysis Recommendation

42 out of 46 Yahoo Finance Analysts give Facebook a buy recommendation. Out of that 42, 17 give FB a strong buy.

(Source: Yahoo Finance)

Current I Know First Bullish Forecast for FB

I Know First Algorithm recognizes the 3 month potential for FB and, thus, gives the 3 month forecast a strong predictability of .16 and a signal of 44.97. Also, both the 1 month and 3 month forecast are bullish.

Conclusion

I believe that Facebook is a good medium term buy, preferably for three months. There are a lot of positive signs that show that Facebook’s stock will rise for the time being. For instance, Q1 results were better than expected. On top of that, their financial ratios beat out both Google and Twitter, Facebook’s main competitors. Also, the moving average shows two bullish signs for FB, and analysis support this forecast by giving the stock a buy rating. So, I think it’s safe to say that FB will continue to rise into Q2 as the Cambridge Analytica turmoil boils down.

However, there are many problems that Facebook is facing. I think it will be hard to bring Youtubers into the IGTV community. Content creator’s subscribers already know where to find them and are comfortable with viewing them on that platform since they are not affected by monetization. When a content creator switches platforms, it’s impossible to bring over all their fan base. However, I do think it’s possible to bring in new creators to help with the success of IGTV. But, one problem I have with this service is Facebook’s push for one hour long videos. Most people using Instagram scroll through and only watch short 30 second videos and move on. I do not think Facebook will have success in keeping viewers engaged for over an hour, due in part to the content being vertical and easily skippable.

The same goes for Facebook’s gaming page. They are trying to build off of others success while not creating something new and exciting on their own. I do not believe Facebook’s gaming page will be successful at all. Take Google Plus for example. Google tried copying the success of Facebook by making a clone of it, Google Plus. The attempt was an absolute failure and the service barely had any active users. This is going to be what happens to Facebook. They are trying to copy-cat Twitch and, in the end, fb.gg will be a barren wasteland. As Google has learned, it is hard to move over users from one platform to another.

However, these two services, IGTV and FB.gg, are part of the reason I give Facebook a medium term buy. For a short while, these services will be used, bringing in millions of unique and active users. Facebook will be able to sell advertisements to these platforms and bring in more revenue for Q2. However, viewership will fall off for these two platforms in the long run, leading to shrinking advertisement revenue.

Furthermore, Facebook’s whole data collection model may be trouble. The stoppage of Facebook’s data collection is beginning to go widespread, starting with Apple  updating the App Store to cut off certain apps from collecting data. The Cambridge Analytica scandal showed the world the different ways in which Facebook utilizes users’ data and now more companies and governments may start taking action on data collection. This spells trouble for Facebook.

Finally, in the long run, Amazon is too dangerous for Facebook. Amazon has Twitch, which Facebook is trying to replicate, and is now gaining immense power in the advertisement sector. As Amazon gains steam, it will begin taking revenue from Facebook, hurting the tech company’s future earnings. But for the foreseeable three months, Facebook does not have much to worry about.

I Know First’s forecast coincides with my medium term forecast, since their 3 month forecast is bullish.

Past I Know First Algorithm Forecast Success with FB

On April 26th, 2017, I Know First Algorithm issued a bullish forecast for FB, with 1-year signal of 143.95 and predictability of 23, FB has gained 15.7% during that 1 year forecast.

This bullish prediction was sent to the current I Know First Subscribers on April 26th 2018

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