Please ensure Javascript is enabled for purposes of website accessibility

Facebook's Stock Rose 50% in the Last 12 Months—Here's Why

By Lawrence Nga – Updated May 13, 2021 at 4:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Facebook is well positioned to grow over the next few years.

Tech stocks are so 2020. With the economy reopening and vaccinations underway, many investors think things will soon go back to normal. So the hot money that fueled the tech rally is now flowing into reopening plays like restaurants and brick-and-mortar retailers. As a result, some of 2020's hottest tech stocks -- like Zoom Video Communications (ZM -1.18%) and Peloton Interactive (PTON -1.70%) -- are down 40% to 50% from all-time highs.

But the steady performance of Facebook (META -0.54%) flies in the face of this trend. Facebook shares are up 14% this year, and only recently hit an all-time high of $331. Here's why Facebook has kept rolling -- even as its peers run out of steam.

A happy woman looking at a phone

Image source: Getty Images.

Facebook is smashing expectations

In 2020, the emergence of COVID-19 shocked the global economy to a halt. Restaurants saw business slow to a standstill while travel companies sank under a wave of massive cancellations. Understandably, investors thought advertisers would slash their budgets, hurting Facebook. They couldn't have been more wrong. With people forced to stay home during COVID-19 lockdowns, they spent more time online connecting. And as the big daddy of social media platforms, Facebook was in the right place at the right time.

Facebook ended 2020 with $86 billion in revenue, up 22% year over year. Net profit surged 58% to $29 billion. Building on last year's momentum, Facebook reported a 48% rise in revenue in the first quarter of 2021. Net profit jumped 94%, smashing Wall Street's expectations. Most of this outperformance was attributed to a 30% year-over-year increase in the average price per ad, and a 12% rise in ads delivered.

In other words, Facebook's online real estate is now a whole lot more valuable -- and investors have taken notice.

An undemanding valuation

For most of 2020, Facebook traded at about 10 times sales while Zoom -- one of last year's hottest tech stocks -- traded at over 50 times sales over the same period. 

Of course, there's good reason for investors to be optimistic with the latter. Zoom's revenue rose a mind-blowing 326% in 2020, fueled by the rise of video calling during the pandemic. But at the same time, its valuation rose to sky-high levels, making it an extremely risky proposition.

Zoom has since fallen 49% from its peak as investors rotate away from high-risk stocks while betting on life getting back to normal. Still, it continues to trade at 33 times sales. Facebook -- even after rising 45% over the last 12 months -- trades at less than a third of that multiple.

As the tide turns on high-risk, high-reward bets, investors have grown more comfortable holding on to Facebook or even buying more. That probably explains why Facebook continues to march forward when most of the high-flying tech stocks have declined in the last few months.

Facebook's next chapter

Over the next few years, Facebook is expected to take bigger steps toward monetizing its other properties, such as Instagram and WhatsApp. This will unlock a new source of revenue for the company and sustain its growth trajectory.

In the long run, Facebook's ambitions stretch far beyond social media. It is working on new ventures including e-commerce, virtual reality, and payments. These opportunities could dramatically widen Facebook's addressable market, and sustain its growth over the longer term.

Still, investors should be aware that Facebook faces a unique set of challenges. This includes its ongoing clash with Apple and calls to break up the company. Investors should keep an eye on these developments over the coming quarters.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook, Peloton Interactive, and Zoom Video Communications. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$135.68 (-0.54%) $0.73
Zoom Video Communications Stock Quote
Zoom Video Communications
ZM
$73.59 (-1.18%) $0.88
Peloton Interactive, Inc. Stock Quote
Peloton Interactive, Inc.
PTON
$6.93 (-1.70%) $0.12

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
332%
 
S&P 500 Returns
104%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.