Facebook FB is set to release its second quarter fiscal 2020 financial results on Wednesday, July 29. The social media giant’s report comes as global advertising spending takes a coronavirus hit. And as is often the case these days, Mark Zuckerberg’s company is surrounded by controversy.

Nonetheless, Facebook shares rest around 5% off their mid-July highs and have outpaced the broader tech sector and the likes of Microsoft MSFT and others since the market’s March 23 lows, up over 60%. 

Too Big to Fail?

Facebook has eventually overcome all of its attacks since the #DeleteFacebook push following the Cambridge Analytica user data scandal in early 2018. FB already bounced back from its latest controversy that saw many big-name companies temporarily ‘boycott’ advertising. Yet, many firms were already likely to pull back on spending during the economic downturn.

More importantly, roughly 75% of Facebook’s ad spending comes from millions of small and mid-sized businesses, according to Deutsche Bank. These smaller companies can little afford to cut exposure on such a massive and impactful space that reaches about a third of the global population.

Facebook’s daily active users climbed 11% to 1.73 billion in the first quarter, while its MAUs popped 10% to 2.6 billion. Both of these growth rates topped recent periods. Plus, overall engagement across Facebook, Instagram, WhatsApp, and Messenger increased during the stay-at-home push.

Another important factor to consider is the overall momentum in digital ad spending that’s set to benefit Facebook, Google GOOGL, Amazon AMZN, and many others. The percentage of total U.S. ad budgets spent on digital channels is projected to expand from 54% in 2019 to 67% by 2023, according to eMarketer.

In the end, Facebook and its various platforms might simply have too many users to ignore in an age where hundreds of millions of consumers pay to avoid ads on Netflix NFLX, Disney+ DIS, Spotify SPOT, and countless others.

The more legitimate concern seems to be further government intervention in both the U.S. and elsewhere. Investors should remember that Facebook has already paid a historic $5 billion FTC settlement for user privacy issues.  

 

 

 

 

 

 

 

 

 

 

 

Other Fundamentals

The social media powerhouse announced in May its new “mobile-first shopping experience where businesses can easily create an online store on Facebook and Instagram for free.” The firm is working with Shopify SHOP on its new Facebook Shops that deepens its expansion into the booming e-commerce space to challenge Etsy ETSY and others.

FB has already found some success with its Marketplace that competes against the likes of eBay EBAY and Craigslist, and Shopping directly on Instagram was already growing in popularity. Facebook is also expanding WhatsApp’s business services.

On top of that, Facebook in April said it would pay $5.7 billion for roughly 10% of Indian telecom powerhouse Jio Platforms Ltd. The move is a bet on the massive Indian market (roughly 1.3 billion people), where FB already has over 400 million WhatsApp users.

Overall, FB shares have climbed 150% in the last five years, against the tech sector’s 90%. That said, Facebook is behind all of its FAANG peers aside from GOOGL over that stretch.

Despite sitting near its highs, FB stock is trading at 7.8X forward 12-month Zacks sales estimates. This marks a discount compared to its own one-year high of 8.4X and Microsoft’s current 10.2X.

On top of that, Facebook holds roughly $50 billion in cash and equivalents, even taking into account its Jio investment and its $5 billion FTC settlement that took effect in April 2020 after Q1. This cash position should help FB weather the ongoing pandemic storm and help it invest in new growth areas.

 

 

 

 

 

 

 

 

 

 

 

 

Bottom Line

Last quarter, FB sales jumped 18%, with its adjusted Q1 earnings up over 100%. And company executives calmed Wall Street nerves about its ad sales, noting that it saw “signs of stability reflected in the first three weeks of April, where advertising revenue has been approximately flat compared to the same period a year ago.”

With this in mind, Facebook’s second quarter sales are projected to climb 2.5% to $17.31 billion. Meanwhile, its adjusted quarterly earnings are expected to soar 58% to come in at $1.44 a share.

Peeking further ahead, FB’s Q3 revenue is projected to climb 7.2% to help lift its full-year FY20 sales by 10%. And its adjusted fiscal 2020 EPS figure is expected to pop 14.5% to come in at $7.36 per share.

These top-line growth figures don’t jump off the page and mark a slowdown compared to Facebook’s recent and historic sales expansion. However, these are unusual times and FB’s outlook appears far better than even the tech portion of the S&P 500—which is set to come in well ahead of the broader market.

Facebook is currently a Zacks Rank #3 (Hold) that has seen some positive earnings revisions in the last seven days, which means at least some analysts are higher on the stock. FB also earns a “B” Growth and an “A” for Momentum in our Style Scores system.

Some might want to see how its Q2 results shake out. That said, longer-term investors could consider buying Facebook stock given its massive global reach, e-commerce expansion, and more.

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