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2 Reasons Facebook Stock Is a Buy

By Lawrence Nga - Mar 4, 2021 at 12:37PM

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Facebook grew at high rates despite the ongoing economic effects from COVID-19.

Between the four major U.S. social media stocks -- Facebook (FB 1.18%), Twitter (TWTR 2.68%), Pinterest (PINS -0.99%), and Snapchat (SNAP 0.26%) -- which was the worst performer of 2020? 

If you guessed Facebook, you're right. Pinterest's 250% price rally in 2020 far outpaced Facebook's 31% gain. Facebook's returns also lagged the Global X Social Media Index ETF (SOCL 0.67%), which tracks over 30 companies involved in social media. In 2020, the ETF posted an annualized return of 78.4%. 

That said, it's too early to call Facebook an underperformer. This, after all, is a company that's consistently delivered double-digit percentage growth year after year. The big question is: Can this FANG stock get its bite back? I think so, and here are two reasons why.

Smiling woman in suit

Image source: Getty Images.

1. Facebook executed incredibly well despite COVID-19

Ask corporate America what they thought about 2020 -- and many will tell you it was the worst year of the decade. The coronavirus devastated many companies in industries ranging from retail and energy to tourism.

Facebook had a pretty good year, though.

In 2020, Facebook's revenue rose 22% to $86 billion, driving a 58% surge in net profit to $29 billion. Monthly active users (MAU) also grew 12% year over year, to 2.8 billion.

Initially, there was concern that advertisers would cut back on spending, hurting Facebook's revenue. But those fears turned out to be unfounded. Forced to stay at home due to COVID-19, people spent more time on social media. To reach these users, businesses had little choice but to keep advertising on Facebook -- by far the largest social media network. In 2020, nearly a third of every digital advertising dollar went to Facebook, according to a report by the World Advertising Research Center (WARC).

These numbers validate the strength of Facebook's business model, which is anchored to the value it provides users. For one, the Facebook family of services -- including Facebook, Messenger, Instagram, and WhatsApp -- keeps people connected. But Facebook provides much more than "just" communication tools. Its apps are also an avenue for news, entertainment, and business. All these features have made Facebook simply indispensable -- and more so amid the pandemic.

Facebook made a few smart moves in 2020. One of them was a renewed push into e-commerce, in partnership with Shopify (SHOP -7.02%). With the launch of Facebook Shops and other e-commerce tools, both companies will make it easier for Facebook's users to grow their online businesses. 

This gives users yet another reason to spend time on Facebook. And if successful, Facebook's e-commerce initiatives could improve its user monetization.

2. Investors aren't very excited about Facebook

As the pandemic ravaged global economies, many small businesses were forced to shut down. Millions of Main Street Americans have lost their jobs.

Still, Wall Street had one of its best years ever. The Nasdaq Composite (^IXIC -0.30%) rose 44% in 2020 -- its best performance in 11 years, according to MarketWatch.

Shares of Shopify and MercadoLibre almost tripled in 2020 as they rode on the tailwinds caused by the pandemic. But Facebook -- which benefited from the pandemic and delivered solid revenue and profit growth -- rose a relatively measly 31%. 

I think investors haven't neglected Facebook's strong execution in 2020. Instead, they've been rattled by repeated calls to break up Facebook, as well as its very public clash with Apple. That has taken some glitter off Facebook, resulting in it trading at a valuation of less than nine times 2020 revenue.

While that appears reasonable, consider the astronomical valuations enjoyed by trendier tech companies like Snowflake (SNOW -3.63%). Snowflake trades at a whopping 277 times 2020 sales.

Why Facebook is a buy now

Facebook shines when it comes to consistency and growth. Between 2016 and 2020, revenue rose at an impressive compound annual growth rate of 33%. 

In coming years, Facebook will likely keep growing at double-digit rates as it unlocks the value of Instagram and WhatsApp. Facebook could also deliver upside surprises with newer ventures, including the Oculus virtual reality platform and payment services.

In the near term, there's a risk of a pullback -- given Facebook shares have almost doubled from their March 2020 lows. But that shouldn't deter investors with a five-year time horizon. Facebook is here to stay, and it will only get bigger in years to come.

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Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$193.54 (1.18%) $2.25
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$11,354.62 (-0.30%) $-33.88
Mercadolibre, Inc. Stock Quote
Mercadolibre, Inc.
$775.65 (-3.23%) $-25.92
Global X Funds - Global X Social Media ETF Stock Quote
Global X Funds - Global X Social Media ETF
$36.27 (0.67%) $0.24
Twitter, Inc. Stock Quote
Twitter, Inc.
$38.29 (2.68%) $1.00
Shopify Inc. Stock Quote
Shopify Inc.
$363.85 (-7.02%) $-27.48
Snap Inc. Stock Quote
Snap Inc.
$23.26 (0.26%) $0.06
Pinterest Stock Quote
$22.91 (-0.99%) $0.23
Snowflake Inc. Stock Quote
Snowflake Inc.
$141.49 (-3.63%) $-5.33

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

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