Things could be slowing down for Facebook (FB) stock in the coming years, as small medium business spending trends illustrate a bit of a slowing shift from recent advertiser surveys, and the stock continues to get mired in controversy relating to privacy. Though, this doesn’t mean Facebook is no longer an attractive growth investment vehicle, it has become increasingly likely that the rate of up-take for digital advertising will slowdown, which may taper the long-term growth outlook for the company.
Facebook stock has grinded its way higher from a bottom of $120 from the beginning of January up until the current price of $176 per share. The stock has remained range bound for a couple weeks, and things may improve assuming the adoption of more advertisers. However, the key to Facebook’s valuation remaining compressed may have a lot to do with the uncertainty of growth or adoption of Facebook’s advertising products among small/medium sized businesses, and the negative perception of the social networking site in general, which has kept the valuation below its full potential.
Usage on the platform has steadily grown, but perhaps pricing has become a bit of a challenge in the past couple quarters. Hence, the revenue growth rate could be slowing due to a diminishing of interest or adoption for various Facebook ad products. The slowing penetration for various Facebook ad products has a lot do with heightened saturation for those advertising products, and challenges that could be tied to producing a return on investment from those activities.
This speaks to the more competitive nature of ad-bidding, which has created hurdles for smaller businesses that need to bid lower amounts to even earn a gross profit from advertising, or the fact that there’s some legwork involved with determining how much of a return they can generate from these activities.
It doesn’t necessarily mean that Facebook’s advertising products will become less relevant, but what it points to is a more difficult environment for advertisers looking to justify the spending. Morgan Stanley has recently released an advertising industry survey that points to a diminishing of advertising ROI (return on investment) when compared to Google Search.
Historically, Google Search was considered to be the more expensive of the two options, but things may have changed, and as a consequence when compared to last year’s survey, Facebook is no longer seen as providing the highest ROI from advertising.
Source: Morgan Stanley
Things get a little confusing, because quantifying the sentiment among advertisers in terms of business results is difficult, but from a shareholder perspective, this can be perceived as a little bit troubling. If advertisers no longer see Facebook as the number 1 option for producing returns, it’s going to result in less money spent by advertisers as they look to buy ads from other online platforms. Working out these key advertiser metrics is crucial for Facebook going forward, but to do this, it may mean that the pricing for those same advertising units will have to come down.
In the same survey, advertisers who use Facebook to display ads have gone down by about 10 percentage points from the prior-year. It used to be 80% of advertisers, and now 70% of advertisers are still on the platform. This drop-off in the number of advertisers may have to do with the pricing of the ads, or really the inability to make money from running those ads. Whatever the case may be, it’s certainly an indication that things could be slowing down, as advertisers attempt to look for other options other than Facebook.
This probably doesn’t bode as well for shareholders who have become accustomed to 30%+ revenue growth rates. Over the current fiscal year, the growth in revenue will likely slow, perhaps not by a significant margin, but it will become more noticeable.
This might lead the stock to become more volatile, but given the company’s 20x P/E, it’s not like investors are pricing-in a whole lot of growth anyway, and they probably shouldn’t given the more mature profile of online advertising and a slowdown in acquiring new businesses to advertise on the platform.
TipRanks’ data shows an overwhelmingly bullish camp backing the social media giant. Facebook stock has amassed 34 ‘buy’ ratings in the last three months vs. 6 ‘hold’ and 1 ‘sell’ ratings. The 12-month average price target stands at $194.11, marking nearly 10% return for the stock. (See FB’s price targets and analyst ratings on TipRanks)
Disclosure: The author has no positions in FB stock.
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