Actions of Facebook (NASDAQ:FB) gained 10% after the tech giant announced better-than-expected first quarter results on April 29. The FB title has now made up for all the ground lost since the start of the year.
With people staying at home, the number of user engagement has skyrocketed, while daily active users have increased 11% year over year. In addition, monthly platform users reached 2.6 billion, up 10% from the quarter of the previous year.
The company’s revenues increased by 18%, but by 8% compared to the same quarter last year. Excluding legal costs of $ 3 billion in the prior year quarter, net income decreased 9.7%. Perhaps the main concern of the company is its advertising revenue.
In an interview with CNBC, Facebook chief financial officer David Wehner said there has been a general decline in advertising revenues for small and large businesses. However, Facebook’s problems seem to be short-lived and the FB title is expected to soar in the second half.
Here are some of the reasons why I think the company’s apparent concerns are not to be feared.
FB stock and balance sheet
Facebook’s balance sheet numbers are solid and enough to withstand any storm that arises. In its last quarter results, cash and cash equivalents increased by 23.79% and total assets exceeded total liabilities by 1.45%.
Working capital increased 6%, continuing where it left off the previous year. The company’s current assets are approximately $ 70 billion, up sharply over the past five years. Its negotiable securities alone are sufficient to cover its total liabilities.
In addition, equity also increased 4.21% during the quarter. Facebook currently has no long-term debt, which is staggering for a company over $ 550 billion. It continues to grow organically with enough resources to cancel its minimum financial obligations.
Falling advertising revenues
Social networking, live streaming and messaging platforms have seen an increase in online traffic, but that doesn’t necessarily lead to more conversions.
Facebook can only exploit this growing traffic if it is paid for by its advertisers. However, advertising spending has taken a major hit. In addition, small and medium-sized enterprises (SMEs) have also reduced their advertising as part of their belt tightening initiatives.
Marketing research company eMarketer estimates total media advertising spend should reach $ 691.7 billion, up from $ 646 billion the year before. He expects a rebound in the second half and forecasts a jump to $ 712 billion.
In the short term, however, Facebook is expected to incur substantial losses due to its dependence on SMEs. However, in a recent conference call, CFO Dave Wehner revealed that advertising spending is already starting to recover.
“After a sharp initial drop in advertising revenue in March, we saw signs of stability in the first three weeks of April,” he said. Despite these claims, analysts expect a further deceleration in advertising revenue in the second quarter.
The decline in advertising revenues depends mainly on the recovery of SMEs in the second half. The situation continues to develop, but with the lifting of restrictions worldwide, it is an encouraging sign for small businesses to restart their business activities.
Explore new growth paths
Facebook is one of the most innovative companies in the world, which continues to explore new expansion opportunities. Recently, the company announced a suite of new products, including Messenger Rooms, to expand its video presence.
Message rooms allow users to create virtual Hangouts with up to 50 users, who can enter and exit at any time. The company also announced that it will roll out new live streaming features for Facebook and Instagram.
In addition, Facebook has also released its mobile gaming application, its most significant decision in the field of video game streaming. With most of the world inside, the video game industry takes off during the pandemic. Originally scheduled for June, the company decided to release the app in April once the scope of the pandemic became clear.
One of the most significant developments of the quarter was the company’s $ 5.7 billion investment in the minority stake of Indian telecoms giant Jio.
Jio has become India’s largest mobile network owned by India’s most successful conglomerate companies, Reliance Industries. The network currently has more than 387.5 million subscribers and has been adding customers since its launch in September 2016. India’s fragmented market offers Facebook a huge opportunity to reach more consumers thanks to its various services.
The majority of analysts believe that the FB stock is currently undervalued. Refinitiv’s data set the company’s average price target at $ 237. With the FB share price at $ 203, consensus estimates from Refinitiv suggest the company is undervalued by 17%.
Three of the major Wall Street companies, including JP Morgan and RBC Capital Markets, also believe the business is undervalued. The company’s forward PE ratio is 26.9, which is considerably lower than the current industry average of 33.6.
It therefore appears that the company’s multiples are not in line with the market and indicate an undervaluation. As a result, the stock is currently trading at a great price, and investors can buy the stock through an attractive entry point.
Facebook has enough in the tank to fend off its short-term challenges. The drop in advertising spending will not last forever and profits will eventually rebound in the second half.
Even if the business’s performance during the year is below normal, its solid fundamentals and cash reserves will allow it to weather short-term risks. It is currently a positive free cash flow with significant assets to meet its minimum liabilities. Therefore, it’s time to get your hands on the stock while it is trading at a good price.
At the time of writing, Muslim Farooque had no positions in any of the above titles.