Where Will Facebook Stock Be In 5 Years? Spotlight On Instagram Reels, Shops And Metaverse

Oct. 07, 2021 5:01 PM ETMeta Platforms, Inc. (META)33 Comments12 Likes


  • FB's shares did well year-to-date thanks to the company's revenue and earnings beats, but its stock price underperformed in the past month as a result of negative news flow.
  • I am positive on Facebook's growth prospects in the next 5 years, and I view the sell-side's expectations of mid-teens earnings growth over this period as reasonable.
  • Facebook stock is a Buy, as its valuations are attractive relative to its future growth and ROEs.
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Social media app for digital marketing e-commerce on smartphone mobile online applicatiion via multi-channel, cross-channel internet technology

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Elevator Pitch

My investment rating for Facebook, Inc. (FB) is a Buy or Bullish.

The larger-than-expected negative effects of Apple's (AAPL) iOS privacy changes, a recent outage across its platforms, and a former employee questioning the company's corporate culture, are the key events that hurt FB's stock price performance in the last month.

Facebook's growth over the next five years will be driven by Instagram Reels, Shops and Metaverse-related opportunities, on top of the greater shift toward digital advertising, in my opinion.

I assign a Buy or Bullish rating to Facebook. A 20.9 times forward FY 2022 P/E seems too low for a company boasting ROEs and bottom line growth in the mid-20s and the mid-teens, respectively.

Company Description

In its fiscal 2020 10-K filing, Facebook, Inc calls itself a creator of "useful and engaging products that enable people to connect and share with friends and family", and the company highlighted that "we generate substantially all of our revenue from selling advertising placements to marketers." When I mention Facebook or FB in this article, it will be typically referring to the company rather than the product, unless otherwise stated.

First established in February 2004, FB's current key products include Facebook (the product), Instagram, WhatsApp and Messenger among others. Facebook, Inc boasted a Family Monthly Active People or MAP of 3.51 billion as of the end of the second quarter of 2021, making it the leading global social media company. FB defines MAP as "a registered and logged-in user of one or more Family products who visited at least one of these Family products" in the past one month, as per the company's 10-K filing.

In the first half of this year, the US & Canada accounted for 43% of Facebook's revenue. The Europe, Asia Pacific, and Rest of the World geographic markets represented the other 25%, 23% and 9% of FB's top line, respectively in 1H 2021.

FB Stock Price

FB's shares have performed reasonably well in the first nine months or so of the year, but Facebook's stock price is not doing as well in the past one month.

Since the beginning of this year up to October 6, 2021, the Dow Jones, the Nasdaq and the S&P 500 rose by +12.4%, +12.5%, and +16.2%, respectively. Facebook's shares did even better than the broader market year-to-date, as its share price grew by +22.1% over this period.

It is not difficult to appreciate why Facebook has outdone the benchmark stock indices in terms of price performance year-to-date in 2021, if one looks at the revenue and earnings surprises chart below. FB's quarterly revenue has exceeded the market consensus' forecasts for 11 quarters running, while its quarterly earnings per share were also above the sell-side analysts' estimates for six consecutive quarters. More significantly, Facebook's Q1 2021 top line and bottom line were ahead of market expectations by as much as +10% and +40%, respectively. FB continued its revenue and earnings beat in Q2 2021, albeit with a relatively lower degree of outperformance against Wall Street's numbers.

Facebook's Historical Revenue And Earnings Surprises

Source: Seeking Alpha's Earnings Page For Facebook

In the company's Q2 2021 results press release, Facebook attributed its excellent financial performance to "a 47% year-over-year increase in the average price per ad", and it guided that "advertising revenue growth will be driven primarily by year-over-year advertising price increases during the rest of 2021." This gives the sell-side analysts the confidence to project a +39% top line expansion and a +40% growth in earnings per share for Facebook in FY 2021, which will mark the company's strongest growth in the past four years as per S&P Capital IQ data.

However, Facebook's share price performance has disappointed the market in the last one month. FB's shares dropped by -11.3% in the past month, while the three major stock indices only saw declines in the low-to-mid single digit range over this period.

There are a number of negatives news events that resulted in Facebook's dismal stock price performance in the recent one month.

Firstly, Facebook published an announcement on September 22, 2021, highlighting that "the cost of achieving your business outcome may have increased and it’s also gotten harder to measure your campaigns on our platform" for the company's clients, following Apple's iOS privacy changes.

On the positive side of things, FB emphasized in the same announcement that it is currently working at "improving campaign performance by adapting in the areas of targeting, optimization, delivery and measurement." I think that Facebook's access to a significant amount of first-party data and its size of its user base should allow the company to adapt to these changes and emerge stronger as compared to its smaller competitors.

Secondly, Facebook's key products & platforms suffered from a "six-hour outage" on October 4, 2021, as reported by Reuters. A Seeking Alpha news article on October 6, 2021 citing data from Sensor Tower noted that Snapchat (SNAP) and "Telegram, Signal, Twitter (TWTR), and ByteDance's (BDNCE) TikTok" saw higher levels of activity on October 4, 2021.

Of course, it is natural that users switched over to alternatives during the outage. But it is unlikely that people will spend significantly less time on Facebook's products and platforms going forward, simply because of this one-off event.

Thirdly, FB's corporate culture has come under intense scrutiny again. CNN reported on October 5, 2021 that "a former Facebook product manager", Frances Haugen "testified in the Senate", claiming that Facebook "puts profit over people."

It is noteworthy that Facebook's ranking on Glassdoor's list of Best Places To Work In America dropped from first in 2018 to 23rd in 2020, prior to climbing up to 11th in 2021. Although rankings are subjective, it does reflect to some extent potential issues within the company. More importantly, the recent whistleblower incident raises the regulatory risk profile of FB. Given that it is difficult to predict regulatory developments, it is uncertain if Facebook will eventually get away with a fine, or be asked to break up its monopoly.

In the subsequent section, I look beyond the near-term headwinds for Facebook, and take a stab at predicting where Facebook could potentially be in five years' time.

Where Will Facebook Stock Be In 5 Years?

I see Facebook sustaining a reasonably high level of growth in the next five years, and this is backed up by market consensus' financial estimates and the company's growth drivers.

Wall Street analysts expect FB to deliver annual top line and bottom line growth rates around the mid-teens percentage levels between fiscal 2021 and fiscal 2026. I think these financial forecasts are achievable. Facebook's future revenue growth is expected to be supported by the expansion of the digital advertising market, and an increase in price per ad driven by new product features. Separately, FB's profit margins should increase gradually or at least remain relatively stable in the coming years, as the ad price increases and the positive effects of operating leverage are partially offset by investments in new growth areas and product features.

MAGNA, which refers to itself as "the leading global media investment and intelligence company" on its website, has forecasted that digital advertising's share of the global advertising market as a whole will increase from 59% in 2020 to 70% by 2025, and this represents a +9% CAGR for digital advertising spending in absolute terms over the same period.

Apart from riding on the growth of the global digital advertising market, Facebook should benefit from certain key new product developments.

One of them is Instagram Reels. FB first introduced Instagram Reels, which it calls "a new way to create and discover short, entertaining videos on Instagram" on August 5, 2020. Although Instagram Reels have often been referred to as a "TikTok" clone, this new product has seen initial success, and exhibits strong growth potential.

At the company's Q2 2021 investor briefing, Facebook revealed that "Reels is already the largest contributor to engagement growth on Instagram", but noted that it has "just really begun to make ads available globally on Reels" and mentioned that video ads on Instagram Reels "is still monetizing at lower rates versus feed stories." Quantitative disclosures with regards to Instagram Reels are still very limited now. But there is a high probability that Instagram Reels will surprise the market in terms of active user numbers, advertiser take-up and monetization rates in a few years' time, going by the company's recent comments on Reels at its earnings call.

Another significant growth opportunity worthy of mention is e-commerce. FB had highlighted at its second-quarter earnings call that it is "building a modern commerce system across ads, community tools, messaging, shops and payments."

In May 2020, Facebook launched Shops, which it notes is "a mobile-first shopping experience where businesses can easily create an online store on Facebook and Instagram for free." Similar to Instagram Reels, FB has yet to share any actual numbers, but it did stress at its recent quarterly briefing that "there are already a pretty meaningful number of merchants and people who are using Shops." In five years' time, it is reasonable to expect the growth of Shops to translate into significant top line expansion associated with greater "eyeballs reach" and fees positively correlated with transaction volumes.

Separately, payments are also a key element of commerce, and Facebook is also working hard in this area. FB has been increasing new payment options (e.g. Quick Response codes) in the U.S., while introducing WhatsApp payments in India and Brazil. Although Facebook still earns the bulk of its top line from advertising as mentioned in the "Company Description" section of this article, revenue contribution from payments could gradually increase over time as well with the company's efforts in this area.

Lastly, Facebook has its eyes on the long-term growth potential of the Metaverse. FB defines the Metaverse as "a virtual environment" where "we can be present with people in digital spaces", and it specifically mentioned in its Q2 2021 earnings release that its "major initiatives" are "coming together to start to bring the vision of the metaverse to life."

Facebook expects to spend around a few billion dollars every year on Metaverse-related investments for the foreseeable future. As a comparison, the augmented reality market worldwide is expected to be worth approximately $340 billion by 2028 that is equivalent to a +43.8% CAGR for the 2021-2028 period, according to forecasts by Grand View Research. As it stands now, Facebook already has its line of Oculus virtual reality hardware products, and it also recently introduced Horizon Workrooms which allows for people to work together remotely using virtual reality. Close to two years ago, FB had started introducing augmented reality ads.

It is hard to forecast exactly how virtual & augmented reality technologies will evolve or whether the Metaverse will become wildly popular in a few years' time, but it is safe to say that Facebook is well-positioned to capitalize on Metaverse-related growth opportunities.

Is FB Stock A Buy, Sell, Or Hold?

FB stock is a Buy, as its valuations have yet to price in the company's future growth potential and excellent profitability (reflected in its ROEs).

Facebook currently trades at consensus forward FY 2021 and FY 2022 normalized P/E multiples of 23.6 times and 20.9 times, respectively according to S&P Capital IQ. These are very appealing valuations, considering the company's expected mid-teens earnings per share annual growth (highlighted in the preceding section) in the next five years, and ROEs in the mid-twenties (historical averages and forecasted numbers based on S&P Capital IQ data).

FB's key risks are weaker-than-expected profitability due to larger-than-expected investments which do not deliver results in the short-term, and greater-than-expected regulatory and political scrutiny which force the company to break up its monopoly in social media.

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Uncover cheap stocks, great businesses listed in Asia focusing on HongKong
Asia Value & Moat Stocks is a research service for value investors searching for attractive Asia-listed investment opportunities  with a huge gap between price and intrinsic value, leaning towards both deep value balance sheet bargains (i.e. buying assets at a discount e.g. net cash stocks, net-nets, low P/B stocks, sum-of-the-parts discounts) and wide moat stocks (i.e. buying earnings power at a discount in great companies like "Magic Formula" stocks, high quality businesses, hidden champions and wide moat compounders).

Those who believe that the pendulum will move in one direction forever or reside at an extreme forever eventually will lose huge sums. Those who understand the pendulum's behavior can benefit enormously. ~ Howard Marks


Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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