Facebook: Opportunity For Converting Millions Of Businesses Into Paying Advertisers
Summary
- Facebook has 200 million businesses using the site, but 10 million are active advertisers.
- Facebook has a large opportunity to convert many of the non-paying businesses into paid advertisers.
- The stock is valued attractively on a PEG ratio basis.
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Facebook (FB) maintains the lead as the top social media site as measured by daily active users [DAUs] and monthly active users [MAUs]. Facebook now has 1.88 billion DAUs and 2.85 billion MAUs. Google's (GOOG) (GOOGL) YouTube comes in second with over 2 billion monthly active users. As a result, Facebook attracts many businesses to use the platform for advertising to potential customers based on location, interests, and other factors. There is plenty of opportunities for Facebook to increase the number of advertisers on its platforms.
Large Opportunity to Convert Businesses to Become Paid Advertisers
Facebook has over 10 million active paid advertisers. The company has over 200 million businesses using the platform. That provides Facebook with a strong base of potential targets to convert to active paying advertisers. Facebook has various tools to help encourage businesses to advertise. For example, giving businesses the opportunity to boost posts to reach more users for a fee.
The company also encourages business users to promote their page & business and provides various options for doing so. This is done within the user's home page and through the user's message feed. Therefore, active business users get continual encouragement for advertising opportunities. This strategy can help drive more businesses to become paid advertisers. A large number of unpaid businesses on the site (about 190 million) gives Facebook a good long-term growth opportunity for converting them to paid advertisers.
The Digital Transformation Provides Additional Growth Opportunity
There has been a transfer of more business being conducted online even before the COVID-19 pandemic. The pandemic has accelerated this long-term trend. A survey by McKinsey points out that the pandemic sped up the digital transformation by about three to four years. This acceleration is positive for Facebook because the company offers businesses multiple online tools to actually conduct business from their FB pages.
For example, Facebook enables users to conduct paid online events. The company also provides users with the ability to sell products and book appointments from their pages. Online businesses can conduct business from their FB page. Brick-and-mortar businesses can conduct some business from their pages, while advertising to get customers to visit their stores.
McKinsey's survey suggests that the digital transformation changes that accelerated the shift to online business during the pandemic are likely to remain for the long term. Therefore, this shift is likely to help drive Facebook's growth as more businesses use the site and its tools to reach more customers and to conduct transactions.
Takeaway from Facebook's Q1 2021 Earnings Report
Facebook did well where it matters in Q1 2021. The company increased advertising revenue by 46%. This was driven by a 12% increase in the number of ads delivered and a 30% increase in the average price per ad. This demonstrates that Facebook has strength and healthy growth for its core business of advertising.
It is important to note that the company gave cautious guidance for the remainder of the year. Facebook stated that there could be headwinds for ad targeting as a result of the recently launched iOS 14.5 update which could have negative implications for advertisers.
Despite these headwinds, Facebook remains the top social media platform with the most active users. So, advertisers still likely to use the company to get their messages out. However, the advertisers may have less advantages for target marketing based on the updated iOS software.
Facebook's Above Average Growth
As investors, we look for companies with above-average growth which makes it likely for the stocks to outperform the market. Facebook fits the bill with long-term sustainable growth. Facebook is expected to grow revenue and earnings at strong double-digit rates over the next five years according to consensus estimates. If these strong estimates are achieved or exceeded for most quarters, the stock is likely to increase at an above-average pace.
Here are the expected growth rates according to consensus estimates:
| Revenue | Earnings | |
| 2021 | 34% | 28.6% |
| 2022 | 18% | 13.5% |
source: seekingalpha.com
Valuation
Facebook is valued low on a PEG basis, which is the metric I prefer to use for high-growth companies. Facebook's PEG of 1.26 is in the preferable range of between one and two for the high-growth stocks that I cover. The growth stocks valued in this range tend to perform well when they meet/exceed EPS estimates for most quarters.
For context, Facebook is trading below its advertising peer, Alphabet (GOOG), (GOOGL), whose PEG is 1.37. Twitter (TWTR) and SNAP (SNAP) are also trading higher with PEGs of 1.64 and 25 respectively. Facebook's attractive value provides the stock with further upside potential.
source: stockcharts.com
Facebook's price gapped up on the recent positive earnings report. As a result, the RSI and the MACD have been rising, showing price strength. However, the RSI is near an overbought level (just below 70). The MACD turned bullish after a brief pullback, so the price could be entering a new uptrend. The money flow [CMF] has been choppy, so we are not getting a clear reading from it. Investors may want to wait and see how the stock trades after the recent gap up. It is possible that the stock could form a bull flag on a minor pullback. The stock formed a bull flag in March, then again in April, so this pattern might continue.
Facebook's Long-Term Investment Outlook
Facebook's business looks strong over the long term. Multiple years of above-average growth is likely as the company continues to dominate social media with the most active users. Facebook's high number of users is likely to attract more businesses to advertise on the site and to use the various tools available to them. The company has a large opportunity to convert many active businesses that are on the site into active advertisers.
The company does face a risk regarding how it gathers and uses user's browser data to market to them. Regulatory changes could prevent Facebook from using data this way. The company would then have to rely on user interests to market to them which could be less effective. The changes in the iOS 14.5 update could also create headwinds for Facebook's advertisers.
Overall, I expect Facebook to outperform the market over the next two years and probably longer. Facebook has the ability to adapt to any headwinds that it faces. If the company navigates effectively, it should maintain and grow its advertising revenue over time. The company's large number of users makes it likely for Facebook to maintain and grow advertisers over time. The stock tends to maintain a reasonable valuation on a PEG basis. Facebook's revenue and earnings growth is expected to increase at a strong above-average double-digit pace for multiple years.
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This article was written by
Analyst’s Disclosure: I am/we are long FB.
Business relationship disclosure: The article was written by David Zanoni for Kirk Spano's Margin of Safety Investing service [MoSI].
The article is for informational purposes only (not a solicitation or recommendation to buy or sell stocks). David is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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