People who don’t have an active interest in investments or the stock market would probably assume that Facebook is a very bad bet as an investment at the moment. The company has had a horrendous few years, from their privacy issues to the dead-on-arrival status of their proposed crypto-currency, Libra. Because of a combination of bad press and the fact that people are simply becoming bored of the service, social media’s brand user base has actually shrunk considerably since its peak of 2.375 billion in 2018. Fewer people – and especially fewer young people – are registering to use Facebook. Using common sense to judge the situation, should mean that stock prices are falling, and investments are at risk.
That isn’t the case. Facebook’s stock is showing surprising resilience and still represents a solid investment today despite everything that’s going on both inside and outside the company. The fact that there aren’t as many people online with Facebook as there used to be doesn’t matter. The fact that Libra is no more likely to dethrone Bitcoin as the most widely-used cryptocurrency in the world than Elvis Presley is to come back from the dead and have a headline run in Las Vegas doesn’t matter either. The fact of the matter – and the only fact that matters – is that Facebook’s stock price has gone up seventy percent in the past three years. There have been small drop-offs during that time – one of which caused Mark Zuckerberg to call off the sale of his own stock – but the general trend has been an upward one.
There are a number of factors that have gone into this growth, many of which fly below the radar when it comes to reasons you often hear about in the news. You probably read a lot about the failure of Libra, but how much did you hear about the success of Facebook’s online slots venture, the High 5 Casino? Revenue for companies who own and operate online slots websites like UK Online Slots has been increasing steadily for several years, and in 2018 Facebook decided it wanted a piece of that pie. It now allows its users to play online slots without leaving the Facebook website to do so, and their casino has just over one million users. That’s a significant platform to make money with, and it’s made a material difference to the company’s bottom line.
The most important factor in Facebook’s continued financial success is the strength of its marketing and advertising division – the same aspect of the company that has caused the most controversy. The social media brand has been accused of storing too much data pertaining to its users, asking for information that it has no right to know, and passing that information on to other companies a lot more freely than users would like it to. Whether all of those claims are true or even partially true isn’t for us to decide, but Facebook has a clear motivation for doing so. Money from advertising accounts for around 98% of all the money Facebook makes.
It isn’t just the strength of Facebook’s advertising division that’s driving its stock through the roof – it’s the fact that the advertising revenue stream is likely to stay strong. One of the consequences of Facebook having so much information about so many people is that nobody currently offers a better way to target people with promotional material. Companies can filter potential customers by age, location, gender, interest, and even past behaviour, and so long as they’re willing to pay to reach a wide range of them, Facebook is willing to facilitate the deal. It’s hard to imagine how any other company in the world could offer better access to millions of people, and unless a change in privacy laws forces the company to stop using that information, Facebook will remain the first port of call for any large business looking to indulge in targeted marketing.
Further away from the front line of revenues, there’s an expectation among investors that Facebook’s net income will increase in 2020. It fell between 2018 and 2019, but there was a very good reason for that. In 2019, Facebook had to pay an eye-watering five-billion-dollar settlement to the FTC, and that money ate into the firm’s profits. Even with that settlement taken into account, they still delivered a net profit of $18.5bn. The year before, they’d posted a net income figure of $22.1bn. Without the prospect of another multi-billion dollar fine on the horizon, it’s expected that net income will be above $25bn in 2020 – and if it is, that will push stock prices up even higher.
Does all of the above mean that you should cash in all of your stock options elsewhere and go big on Facebook shares? Of course, it doesn’t. We’ve all seen the market change unexpectedly too many times to recommend that, and just because growth seems like an inevitability doesn’t mean it will turn out to be one. Anything could happen between now and the end of the year, and Facebook could yet come up against another obstacle that nobody has thought of. If you’ve been holding back because you’re expecting Facebook’s stock price to fall off the edge of a cliff, though, it’s time to start giving them some serious consideration again. The form guide says that even if their next three years are only half as good as the three years they’ve just had, they should still increase in value by 35%. Plus, who knows – maybe they’ll surprise us all and get that crypto-currency off the ground in the end after all.
Before taking any decision about investing money or making significant changes to your portfolio of stocks and shares, always consult with your current financial adviser or seek the advice of a qualified professional. This article is provided for information only and does not constitute financial advice. Stock prices can go up as well and down, and all investments are entered into at the investor’s own risk. Never invest what you can’t afford to lose – and be lucky with the investments you choose to make!