The coronavirus pandemic is causing shockwaves around the world. Several countries, including the U.S., Italy, Spain, France, India, and others, have requested large swaths of their population stay home to slow the infection rate for COVID-19 and help manage it.
As a result, numerous businesses have been adversely affected and it is reducing revenue for many of these companies to close to zero. Social networking giant Facebook (NASDAQ:FB) is feeling some effect from these actions as well, but it has been fortunate since its conservative financial management has helped it navigate the worst of the downturn.
Let's take a closer look at how the novel coronavirus pandemic is affecting Facebook operations and consider if now is a good time to buy Facebook stock.
It's not all bad news
The immediate impact on revenue from the coronavirus outbreak appears to be negative. The substantial decrease in consumer travel, dining out, and entertainment has caused many companies to reduce or zero-out marketing budgets and that is bound to have some effect on Facebook ad revenue in the next few quarters. It's too early yet to know how much of an effect it will have, but early projections from eMarketer suggest there will be a couple of percentage points drop in digital advertising growth rates for the industry generally, but that digital advertising will still grow for the year.
Facebook management effectively confirmed these projects when it stated on March 24, "We don't monetize many of the services where we're seeing increased engagement, and we've seen a weakening in our ads business in countries taking aggressive actions to reduce the spread of COVID-19."
To address the short-term issue, the company has a choice to make: either reduce ad supply to maintain price per ad or maintain the current levels of ad slot availability and let prices drop. The former option will have the side effect of keeping the user from being inundated with ads, which could improve the user experience and boost engagement with the apps, in addition to maintaining the higher price per ad. Either way, average revenue per user will likely decline in the short term as overall lower ad revenue is spread across more users. But at least Facebook has options for how to address the situation.
On the other side of the equation, the need for social distancing is leading friends and family to seek out alternative forms of communication. Many are turning to the internet, and Facebook is benefiting from that trend. For example, in Italy, people are spending 70% more time on its apps since the crisis started and time spent in group calling is up over 1,000%.
Cash is king
Facebook has enough in financial resources set aside to manage an extended global recession. With $54 billion in cash and marketable securities, it has a very robust balance sheet to account for any potential downturn. Challenging times like these are when liquidity is most valuable.
Tech enterprises around the world are laying off thousands in response to the sudden halt to the economy. For example, tech startup Bird, a vehicle-sharing platform, late last week announced it was laying off 30% of its employees (roughly 400 workers). Facebook's savings and resources should allow it to not only retain its workforce, but to also potentially acquire top-level talent from some of these financially strapped companies.
What's more, entire businesses may wind up as potential acquisition targets because a lack of liquidity means they will be looking for revenue sources to remain in business. This may be why news came out last week that Facebook was considering making a multibillion investment in Reliance Jio, an Indian telecom unit of Reliance Industries that is dealing with some debt issues. The talks of a deal are on hold for the moment due to global travel bans.
Finally, the Mark Zuckerberg-led company offers marketers a unique opportunity to connect with individuals. Few other platforms can offer advertisers access to targeted groups as well as Facebook. This capability is valuable in that it allows connection with a desired set of consumers -- targeted marketing -- not wasting ad dollars by showing them to a broad group that is less inclined to show interest in the product advertised.
Imagine the value to a business of knowing that every Sunday you like to take your family out to lunch at a restaurant in your city. Now, establishments in your area can send you advertisements with the hopes of gaining the privilege to serve you and your family.
Furthermore, with over 2 billion monthly active users across much of the world, Facebook's broad reach offers marketers a much larger audience for its ads.
What this means for investors
The coronavirus outbreak is creating uncertainty for a wide swath of the market right now. Facebook stock, like the rest of the market, is down (off 26% from 52-week highs in Facebook's case). However, Facebook should be stronger than ever when economies around the world return to normalcy.
Now is a potentially good time for investors to start a position in this high-quality tech stock while economic sentiment is pessimistic and the stock price is trading at a discount. As always, during volatile times, it is best to dollar-cost-average your way into the desired allocation.