Facebook is one of the largest technology companies in the world and its share price is closely watched by investors. There are several factors that could impact Facebook’s share price in the future, both positively and negatively. In this article, we’ll examine Facebook’s business model, financial performance, competitive landscape, and other relevant factors to evaluate the outlook for Facebook’s shares.
Facebook’s Business Model
Facebook operates the largest social networking platform in the world with over 2.9 billion monthly active users as of Q3 2022. The platform allows users to connect with friends and family, discover content, and join groups and communities.
The core of Facebook’s business model is monetizing its massive user base through advertising. Advertisers pay to display ads to Facebook users based on their interests, demographics, and behavior on and off the platform. With so much data on user preferences and intent, Facebook can target ads with precision.
In 2021, Facebook generated $117.9 billion in revenue, with advertising making up 97.5% of that total. The remainder came from payments and other fees. Facebook operates a highly profitable business with a net profit margin of over 36% in 2021.
Diversification into Instagram, WhatsApp, and Metaverse
Beyond its core Facebook platform, the company owns some of the world’s largest messaging (WhatsApp) and social media (Instagram) services. This gives Facebook access to even more user data to strengthen its advertising capabilities.
Most recently, Facebook has been investing heavily in its “metaverse” vision of immersive digital worlds. In October 2021, Facebook changed its corporate name to Meta to reflect this new focus. The metaverse provides new long-term monetization potential, but will require significant upfront investment.
Facebook Financial Performance
Facebook has demonstrated excellent financial performance in recent years. Below are some key stats:
| 2021 revenue | $117.9 billion |
| 2021 net income | $39.4 billion |
| 2021 users | 2.91 billion |
| 2021 revenue per user | $40.85 |
A few things stand out from Facebook’s financials:
- Strong growth – Revenues grew 37% from 2020 to 2021.
- High profitability – Net profit margin has averaged over 30% since 2016.
- Increasing revenue per user – Now over $40 per user due to more effective monetization.
Facebook also generates strong cash flows. Operating cash flow reached $56.8 billion in 2021, up 22% year-over-year. This provides Facebook with capital to invest in growth initiatives and acquisitions.
Growth Outlook
In the near term, Facebook expects revenue growth to slow significantly. The forecast is for year-over-year growth to drop to the single digits in Q4 2022 and through 2023. There are a few reasons for this deceleration:
- Tough comparisons to pandemic-boosted growth in 2020/2021.
- Macroeconomic challenges like inflation and supply chain issues impacting advertiser spending.
- Uncertainty around new privacy changes on iOS devices.
- Maturation of core Facebook platform in developed markets.
However, Facebook expects revenues to pick back up to double digit growth over the longer term. New monetization options like Reels ads, commerce, and the metaverse will help drive future growth.
Competitive Landscape
Facebook faces competitive threats on multiple fronts. Key competitors include:
Other social media platforms
Platforms like TikTok, Snapchat, Twitter, and others compete for user attention and advertiser dollars. However, no platform currently matches Facebook’s scale. Facebook’s family of apps had 2.93 billion monthly active users as of Q3 2022.
Alphabet
Google is the market leader in digital advertising, although Facebook has been steadily gaining share. Alphabet generated $257 billion in ad revenue in 2021 vs. Facebook’s $117 billion. However, Facebook’s focus on understanding user intent through profiles and behavioral data provides a competitive edge for performance marketing.
Apple
Apple’s privacy changes have had a significant impact on Facebook’s ad targeting capabilities on iOS devices. This has created some headwinds for Facebook’s revenue growth. However, Facebook is adapting its measurement and attribution tools to mitigate these impacts over time.
Emerging platforms
New platforms like TikTok present fresh challenges as demographic preferences shift. Facebook will need to continue evolving its platforms and features to maintain competitiveness. So far, Facebook has been able to withstand competitive threats by acquiring companies like Instagram and adapting to new trends.
Risks and Challenges
Facebook faces a variety of risks that could impact growth and shareholder value:
Lower user growth and engagement
Facebook may struggle to attract younger users in saturated developed markets, limiting future growth potential. Competition from innovators like TikTok presents a persistent risk.
Reduced ad targeting capabilities
Privacy changes and regulation could limit how effectively Facebook can monetize its users. This may reduce revenue growth potential.
Reputational damage and lawsuits
Controversies around data privacy, election interference, and hate speech have significantly damaged Facebook’s reputation. This could lead to loss of users, advertisers, and employees. Ongoing lawsuits and investigations also present financial risks.
Rising costs
Facebook plans to boost spending by $10 billion in 2022 as it invests in the metaverse. These rising costs could reduce profitability in the near term.
Macroeconomic Factors
As with all stocks, Facebook’s share price will be impacted by broader economic conditions:
Interest rates
Rising interest rates could negatively impact tech valuations. Facebook trades at a current P/E of 14x compared to a 5-year average of 25x. Higher rates may lead to further multiple compression.
Inflation
If operating costs rise faster than revenues, Facebook’s profit margins could be squeezed by inflation. However, the company may have pricing power due to the effectiveness of its ads.
Recession risks
In a recession, advertisers typically reduce spending. This would likely impact Facebook’s revenue growth. However, Facebook’s business held up better than expected during the early stages of the pandemic.
Regulatory Risks
Facebook faces substantial regulatory risks, especially in the EU and U.S. Key areas of focus:
Antitrust
Facebook faces several antitrust lawsuits aiming to break up the company or limit future acquisitions. No major structural changes are imminent, but this will remain an overhang.
Privacy
New privacy regulations like Europe’s GDPR and recent initiatives in the U.S. limit Facebook’s ability to track users and target ads. Compliance costs have also increased.
Content moderation
Governments are pressuring Facebook to increase moderation of hate speech, misinformation, and other objectionable content. But intensive moderation is complex and costly.
Disclosure requirements
Some regulators aim to require more transparency around Facebook’s algorithms and research findings. This could reveal additional embarrassing or problematic issues for the company.
Technical Analysis
From a technical perspective, Facebook shares remain in a long-term downtrend since September 2021. Some insights from the chart:
- The stock has fallen over 55% from its high of $384.33 in September 2021.
- Most recently, the stock bounced off support around $130 and rallied back above its 200-day moving average near $170.
- This bounce could represent a dead cat bounce before lower lows.
- The next key support level is around $120 which could be tested soon if negative momentum resumes.
- MACD recently crossed bearishly below its signal line, pointing to negative short-term momentum.
Overall, the chart indicates risks remain skewed to the downside until Facebook can form a convincing bottom and reversal pattern. Any rally attempt may present an opportunity to sell the bounce.
Analyst Recommendations
Despite Facebook’s challenges, analysts remain fairly bullish:
- 41 buy ratings
- 8 hold ratings
- 2 sell ratings
- Average price target of $220, representing 34% upside from current levels.
Analysts see Facebook’s dominant position in social media, strong advertiser demand, and investments into the metaverse powering returns over the long run.
Valuation
Facebook currently trades at a forward P/E of just 14.1 compared to its 5-year average of 25.2. The company has experienced significant multiple compression over the past year due to its growth struggles and competitive concerns.
However, analysts expect Facebook’s earnings to bounce back and grow at around 13% annually over the next 5 years. If the stock simply retraced back to a P/E of 20x, shares would trade around $240, representing 45% upside.
While risks remain, the current valuation suggests much of the negative outlook is already priced in. The stock appears attractively priced for long-term investors.
Conclusion
In summary, Facebook faces slowing growth and strong competitive and regulatory headwinds. However, the company still operates a highly profitable core business with billions of users. At just 14x forward earnings, Facebook stock appears to discount a lot of the risks.
For investors with a long time horizon, Facebook likely represents good value around current levels. The company dominates social media and will likely continue adapting to competitive and regulatory challenges as it has done in the past. However, in the near-term the stock could see further downside if the challenging backdrop persists.