Benjamin Rosen

About the Author Benjamin Rosen

Originally from Pittsburgh, Ben Rosen is a student at the University of Michigan -- Ross School of Business pursuing his degree in Finance and Management. Ben came to intern for Smarter Analyst after his freshman year where he developed a strong passion for financial markets and confirmed his interest in pursuing a finance-related career. Ben is involved in a number of different organizations, including BBA Finance Club, Michigan Real Estate Club, Enactus, and the Michigan Investment Group, where he serves as sector head for the technology, media, telecommunications desk. In his free time, Ben enjoys playing sports, travelling with friends, and rooting for the Pittsburgh Steelers.

Caution Looms Over Facebook (FB) Stock as Ad Revenues Plummet, Says 5-Star Analyst

As the economy has fallen into a downward spiral over the last month, behemoth corporations have proven that they are not immune. Apple (AAPL), Microsoft (MSFT), Intel (INTC) and more are all down over 10% from early 2020 highs. However, fortunately for these companies, they have physical products to sell. Twitter (TWTR), SNAP (SNAP), and Facebook (FB) don’t.

These social media titans sell services—specifically, ads. Despite the fact that people are home, and are spending more time on social media than ever before, each of these companies is down over 20% since mid-February. Why? As people are at home rather than working, they are not making nor spending as much money as they usually would. Many small business owners are currently unable to allot their normal budgets for digital advertising and, in turn, are halting their ads on each of these sites.

Now, let’s highlight Facebook in particular, which receives a whopping 90% of its annual revenue from ad sales. After consistently increasing throughout the beginning of 2020, the price of Facebook’s ads decreased by 15% each week in March as marketers across all industries have cut ad spend. Zuckerberg’s problems do not end there. COVID19 is also disrupting much consumer sentiment toward purchasing non-essential goods, so user engagement with the ads themselves is abnormally low as well.

Will Facebook, which generates above 98% of its income via advertisements, be able stay afloat as ad traffic plummets into the ground?

5-star Needham analyst Laura Martin believes that this question pertains less to “if” and more to “when.” Martin, who ranks within the 95th percentile among all TipRanks analysts, is confident that stocks and, specifically Facebook, will bounce back quickly following the coronavirus pandemic. Because the economy does not have any underlying fundamental issues, it has potential to boom immediately once this issue clears up. There’s one big problem, though: No one knows when that time will come.

Considering that “virtually all of FB’s revenue is ads, and virtually all of FB’s ads are sold at auction in the real time scatter market,” through which prices were driven down over 60% in the month of March alone, Facebook may struggle generating revenue for the foreseeable future. For FB and its shareholders, this decline, combined with the fact that “travel, entertainment, small business, and certain offline retail” companies continue to allocate their budgets to more quintessential needs (opposed to marketing), is concerning.

To this end, Martin maintains a Hold on Facebook shares due to the vast uncertainty pertaining the duration of this pandemic and, in turn, the company’s future income. (To watch Martin’s track record, click here)

Regardless of revenue headwinds and Martin’s concern, TipRanks analytics exhibit Facebook as a Strong Buy. Out of the 38 analysts offering ratings in the last three months, 36 are bullish on the social media’s stock, while 1 is sidelined, and the other is bearish. Gains in the shape of 28% could be lining investors’ pockets should the average price target of $230.45 be attained over the next year. (See Facebook stock analysis on TipRanks)

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