Is Facebook Stock a Buy?

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Facebook (NASDAQ: FB) blew expectations by releasing its first full quarter of results in the pandemic. The social media giant generated solid revenue and profits, pushing its stock up 8% the day after the announcement. The pace of earnings has also taken this FAANG action to new historic heights.

Now the question for investors is what to do about it. Should they still buy amid a record 33% contraction in US gross domestic product? Also, how will antitrust claims affect the stock in the future?

Despite the blowout quarter, investors still have a lot to consider before buying this stock.

Image source: Getty Images.

Broken income and earnings

In the second quarter, Facebook reported earnings of $ 1.80 per share, almost double the $ 0.91 per share recorded by the company in the second quarter of 2019. In addition, revenue of just 18, $ 69 billion was an 11% year-over-year increase. COO Sheryl Sandberg said revenues were flat in April before starting to recover in May and June.

Indeed, this revenue growth figure showed that the company has felt some of the effects of COVID-19, as revenue increased by 28% over the period last year.

However, due to $ 3.1 billion in additional expenses related to legal settlement and taxes, this quarter also saw net income fall by almost 50%, which heavily skews the double increase in this latest report. . This means that the most recent net income level of $ 5.18 billion is only a 1.4% increase over the past two years. Therefore, profit growth is not as high as it looks.

Meanwhile, the number of daily and monthly active users on Facebook’s platforms increased by 15% and 14% respectively. Facebook attributed these gains to the pandemic, and the company expects engagement to level off or decline slightly as lockdown restrictions relax. Still, second-quarter ad revenue managed to increase in the United States, Canada, Europe and Asia.

After this latest rally, the stock’s price-to-earnings ratio now stands at around 32. This took the multiple to its highest level in about five years.

FB PE ratio graph (forward)

Data by YCharts.

Where is the company at?

Facebook remains in a relatively strong position. In the midst of a pandemic, it still managed to show positive growth. This in itself is an accomplishment given the state of the economy. Holding over $ 58 billion in cash also strengthens its reputation.

However, this success also led to antitrust control. Indeed, it can be argued that Facebook wields monopoly power as the primary source of news and information for billions of people, leaving advertisers with no choice but to turn to the platform of. social media when trying to reach a target audience. Regulators have also raised concerns about the company’s history of buying out small competitors who pose a threat to the social media giant. This is an area of ​​concern that investors should watch closely.

Going forward, even when talking about revenue normalization, depressed advertising activity will be a headwind, especially if COVID-19 persists for a longer period of time. For all news on Facebook and its other platforms, ad revenue generates revenue. The increased engagement of the pandemic means little if advertisers globally cut spending in a declining economy.

The company provided guidance for the third quarter, indicating that July revenue showed comparable results to the second quarter with approximately 10% year-over-year growth (which is expected to persist for the remainder of the year. trimester).

Is Facebook Still a Buy?

Facebook has exceeded expectations and investors have responded favorably. Indeed, the company looks set to fare better than most during this recession. It holds significant cash and analysts expect earnings and revenue growth to rebound in fiscal 2021. That leaves Facebook shares a long-term buy.

Nevertheless, the economy has experienced a record contraction in GDP and the company’s income is highly dependent on economic activity. In the short term, the impacts of the economic slowdown are likely to remain a significant headwind. While Facebook is expected to continue to grow, now is probably not a good time to pay a top review.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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