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Why Facebook Stock Is Headed Higher

By Parkev Tatevosian - Feb 20, 2021 at 12:00PM

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Negative publicity on its handling of user-created content and privacy concerns is keeping a lid on the stock for now. Still, a rebound in economic activity could blow that lid right off.

Facebook (FB 0.71%) is facing criticism for its handling of user-created content on its site. That criticism hit its apex in 2020 when the social media giant found itself smack in the middle of a heated election season. Politicians and large corporations alike are not keen on Facebook's increasing role in people's lives. 

In the eyes of the public, the opposite appears to be true as nearly half of the world's population now uses at least one of its applications. During a pandemic when friends, families, and colleagues are social distancing, billions are logging on to Facebook to stay connected. Whether or not there is validity to the claims against Facebook, its stock could be heading higher. 

A thumbs-up icon.

Image source: Getty Images.

Billions of members and growing 

Facebook is the largest social media company on the planet. A total of 3.3 billion people use at least one of its family of apps that includes Facebook, Messenger, Instagram, and WhatsApp. That figure is up by over 300 million from the year prior. Advertisers can target nearly half of the population of the world by partnering with Facebook alone. Moreover, marketers can pick and choose the scale they want to reach -- globally or within a zip code. The precision offered to businesses increases their advertising efficiency and lowers their customer acquisition costs.

People who use Facebook voluntarily share personal information about themselves, such as their age, relationship status, interests, and where they went to college. This allows another layer of focus for advertisers that reduces wasteful spending even more. Comparatively, people share more information on Facebook than on other social media sites. Those factors contribute to Facebook's ability to generate the highest average revenue per user (ARPU) among its peers.

In the most recent quarter, family ARPU increased by 16.8% year over year to $8.62. In the near to medium term, that figure could get a boost as more businesses are allowed to reopen globally. Facebook's targeting features will be beneficial to local restaurants cautiously being allowed to offer in-person dining again after months of government restrictions that would not allow it. And despite headwinds from the California Consumer Protection Act and updates to Apple's iOS that will reduce the efficacy of its ad targeting, Facebook's leadership status is unlikely to change. 

Digital advertising will surpass television

Television advertising holds the top position in the industry but is expected to move to second soon. Digital ad spending in the U.S. is forecast to grow from $132 billion in 2019 to $243 billion in 2024. Facebook's role atop the digital advertising marketplace combined with the shift in ad spending toward digital give it the potential to continue increasing revenue more than double digits per year for several more years.

A Facebook employee coding at his desk.

Image source: Facebook.

The price is right

Facebook is trading at a discount to Pinterest, Snap, and Twitter when measured by its forward price-to-earnings ratio and price-to-sales ratio. The next cheapest competitor in P/E is Twitter, and it's selling for more than three times the price of Facebook.

A chart comparing Facebook to its peers on financial metrics.

Data source: YCharts.

Admittedly, Facebook may be growing slower (in percentage terms) in terms of users and revenue compared to its peers. Still, in 2020 Facebook added 300 million monthly active users (MAUs), which is more than twice the 124 million MAUs added by Pinterest. Not to mention that in 2020 Facebook's operating profit margin was 38% (coming in a distant second place was Twitter at 0.73%). 

The market offers investors the option to buy Facebook at a bargain, but it may not last long. The stock price of this social media giant could be heading higher soon. 

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Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$200.04 (0.71%) $1.42
Apple Inc. Stock Quote
Apple Inc.
$145.54 (-1.07%) $-1.57
Twitter, Inc. Stock Quote
Twitter, Inc.
$37.39 (-8.18%) $-3.33
Snap Inc. Stock Quote
Snap Inc.
$23.42 (-5.37%) $-1.33
Pinterest Stock Quote
$21.49 (0.09%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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