Are Facebook Shares A Bargain In This Market Rout?

Are Facebook Shares A Bargain In This Market Rout?  | Mar 18, 2020 16:47

Facebook (NASDAQ:FB) investors have been hit hard and fast over the past month. Shares of the world’s largest social media platform have been plummeting in tandem with the S&P 500’s spectacular 25% dive, dropping into a bear market this month. 

The stock, which surged to a record high of $224.20 on Jan. 29, has fallen more than 31% in the past month, underperforming the tech-heavy NASDAQ's 25% slump during the same period. Trading at $149.42 at yesterday's close, FB stock is near the lowest level since January 2019, having given up most of its gains of the past year.

For many analysts, it’s hard to quantify the impact of an imminent global recession for social media companies — all relatively young enterprises that are the product of the unprecedented economic boom of the past decade. That growth provided the backdrop for the longest bull run in the U.S. stock market's history, powered by top technology companies, including Facebook, Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL).

Facebook Weekly Price Chart

But after a slide of this magnitude, investors are wondering whether Facebook will be able to emerge unscathed from the coming economic downturn — which is likely to see advertisers cut their budgets drastically.

Facebook Ad Machine At Risk

During a typical recession, investors generally take refuge in solid companies which have gone survived previous recessions, pay dividends and are cash rich. It's for these reasons analysts on Wall Street this week upgraded many staple stocks, such as Procter & Gamble (NYSE:PG) and Walmart (NYSE:NYSE:WMT). Each is defensive in nature and all have a solid track record of surviving multiple down cycles.

But that's not true for Facebook. Despite its leading share in the social media ad market, Needham analyst Laura Martin said in a recent note that 30% to 45% of Facebook's global revenue comes from advertising categories deemed "at risk" from Covid-19.

In addition, Martin said, six of the 10 largest countries in which advertising proliferates are currently Covid-19 hot spots.

"Our channel checks indicate lower spending in travel, retail, consumer packaged goods, and entertainment, which together represent 30%-45% of Facebook's total revenue," Martin wrote in a note to clients. "As consumer demand has fallen, advertising projections have started to decline," she said.

Martin added that Facebook had 7 million active advertisers at the end of 2019, "suggesting that many are small and may have to eliminate ad spending to survive."

Even before the outbreak of coronavirus, the stock was showing signs of peaking as sales growth slowed. The outlook became even more uncertain amid multiple antitrust probes and more-restrictive privacy regulations globally.

Facebook’s CFO David Wehner said during his earnings call in January that most of the impact of these headwinds still lies ahead as the quarterly results don’t yet reflect the effects of privacy rules like Europe’s General Data Protection Regulation and the California Consumer Privacy Act.

"We expect our year-over-year total reported revenue growth rate in Q1 to decelerate by a low- to mid-single digit percentage point as compared to our Q4 growth rate,” said Wehner. “Factors driving this deceleration include the maturity of our business as well as the increasing impact from global privacy regulation and other ad targeting related headwinds.”

Bottom Line

We don’t favor buying Facebook stock in these uncertain times. The company’s business model is untested for the kind of massive economic shock the global economy is now facing. The combination of tightening regulations and the economic slowdown triggered by a recession means more pain ahead for Facebook.

Related Articles

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (UK) English (India) English (Canada) English (Australia) English (South Africa) English (Nigeria) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 简体中文 繁體中文 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
Saving Changes


Download the App

Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors. is better on the App!

More content, faster quotes and charts, and a smoother experience is available only on the App.