The coronavirus pandemic is causing shock waves around the world. Several countries, including the United States, Italy, Spain, France, India and others, have asked a large part of their population to stay at home to slow the rate of infection with COVID-19 and help manage it.
As a result, many businesses have been negatively affected and this has reduced the revenues of many of these businesses to almost zero. Social media giant Facebook (NASDAQ: FB) He also feels some effect from these actions, but he was lucky since his conservative financial management helped him through the worst of the downturn.
Let’s take a closer look at how the new coronavirus pandemic is affecting Facebook’s operations and whether it’s a good time to buy Facebook stocks.
Not all bad news
The immediate impact on revenues from the coronavirus epidemic appears to be negative. The substantial decline in consumer travel, restaurants and entertainment has prompted many companies to cut or cut their marketing budgets, which will have an effect on Facebook ad revenue in the coming quarters. It is still too early to know what effect this will have, but early projections by eMarketer suggest that there will be a few percentage point decline in the growth rates of digital advertising for the industry in general, but that the digital advertising will continue to grow for the year.
Facebook management did confirm these plans when it said on March 24: “We are not monetizing most of the services in which we are seeing increased engagement, and we have seen a weakening of our advertising activity in countries that take aggressive measures to reduce the spread of COVID-19. ”
To solve the problem in the short term, the company has the choice: reduce the advertising offer to maintain the price per advertisement or maintain the current levels of availability of advertising space and let the prices fall. The first option will have the side effect of preventing the user from being inundated with ads, which could improve the user experience and boost engagement with applications, in addition to keeping the price per ad higher. Either way, the average revenue per user is likely to decrease in the short term as overall lower advertising revenue is spread over more users. But at least Facebook has options to resolve the situation.
On the other side of the equation, the need for social distancing leads friends and family to seek other forms of communication. Many are turning to the Internet and Facebook is taking advantage of this trend. For example, in Italy, people spend 70% more time on its applications since the start of the crisis and the time spent on group calls is more than 1000%.
Money is king
Facebook has enough financial resources set aside to handle a prolonged global recession. With $ 54 billion in cash and marketable securities, its balance sheet is very solid to account for any potential downturn. Difficult times like these are when liquidity is most precious.
Tech companies around the world are laying off thousands of people in response to the sudden economic downturn. For example, technology startup Bird, a vehicle sharing platform, announced last week the layoff of 30% of its employees (about 400 workers). Facebook’s savings and resources should allow it not only to retain its workforce, but also to potentially acquire high-level talent from some of these companies in financial difficulty.
In addition, entire businesses can become potential acquisition targets, as a lack of cash means that they will seek sources of income to stay in business. Perhaps this is why Facebook announced last week that the company is considering a multi-billion dollar investment in Reliance Jio, an Indian telecommunications unit from Reliance Industries which deals with certain debt problems. Talks on an agreement are currently on hold due to travel bans around the world.
Finally, the company led by Mark Zuckerberg offers marketers a unique opportunity to connect with individuals. Few other platforms can offer advertisers access to targeted groups as well as Facebook. This ability is valuable because it allows you to connect with a desired set of consumers – targeted marketing – without wasting advertising dollars by showing them to a large group that is less inclined to show interest in the advertised product.
Imagine the value to a business of knowing that every Sunday you like to take your family for lunch at a restaurant in your city. Now, establishments in your region can send you advertisements in the hope of obtaining the privilege of serving you and your family.
In addition, with more than 2 billion monthly active users across much of the world, Facebook’s wide reach gives marketers a much larger audience for its ads.
What this means for investors
The coronavirus epidemic is currently creating uncertainty for a large part of the market. Facebook’s stock, like the rest of the market, is down (-26% from 52-week highs in the case of Facebook). However, Facebook should be stronger than ever when economies around the world return to normal.
This is a potentially good time for investors to take a position in this high-quality technology stock, while economic sentiment is pessimistic and the stock price is trading at a discount. As always, in times of volatility, it is best to average dollar costs to achieve the desired allocation.