Can the Facebook stock price keep rising?

Facebook stock joined the $1trn club yesterday after the dismissal of legal action lifted its stock price, but can it continue?

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The Facebook (NASDAQ:FB) stock price closed 4.18% higher yesterday following the dismissal of a lawsuit brought against the social media giant by the US government. Yesterday’s share price rise took Facebook stock’s one-year gains to  64% and pushed Facebook’s market capitalisation past $1trn. Yes, it’s official, Facebook stock is now in the one trillion dollar club.

Can Facebook stock stay in the $1trn club? Well, that depends on whether or not Facebook can continue to grow its advertising revenues. Facebook makes 98% of its money through selling ads on its various social media platforms. The company increased its revenues in every quarter of 2020. 2021 has gotten off to a good start, with first-quarter revenues of $26,171. That comfortably beat the $17,737 earned in the first three months of 2020. All in all, Facebook reported $85,965m in revenue for 2020, dwarfing the $27,638m it reported just five years ago. 

Facebook ads and users

Facebook is an advertising juggernaut. It had a 20.2% share of the online ad market in 2019, second only to Google with 31.1%. The online ad market is also fast-growing. It is forecasted to continue to grow at 10%-12% per year on average up to 2025. So, if Facebook can at least maintain its market share, it should see higher revenues.

The number of users on Facebooks platforms (and, of course, how much Facebook can learn about them and how engaged they are) determines how much advertising punch Facebook has. It measures how much, on average, a user is worth to the company (pretty much how much ad revenue each user brings in). Users have been getting more valuable across all territories since at least 2014. At the same time, Facebook continues to grow the total number of users across its platforms.

Much will be made of the substantial drop off in US teenagers citing the Facebook platform as their favourite social app. For example, 42% of US teens had the Facebook site as number one in 2012. By 2020 that number was down to 3%. But, a fairly constant 30% of US teens used Facebook from 2018 to 2020. And teenagers don’t have the disposable income that older users have, and they still favour Facebook. Plus, Facebook has been proactive in seeing off competition. For example, it bought Instagram in 2012, which is more popular with younger audiences. 

Facebook stock price

Seeing as Facebook’s net income margin is fairly consistently above 30% — it dipped to 26% in 2019 due to an increased provision for income tax — higher revenues should translate to higher earnings. Thus, assuming investors are willing to pay a constant multiple of earnings for Facebook stock, its price should increase.

I think Facebook will continue to grow its revenues. But not indefinitely. Yesterday’s dismissal of a legal complaint against Facebook was a small victory that will allow Facebook to continue to use its market power for the time being. The case was not thrown out, raising the possibility of a refiling. Even if that does not happen, I feel US legislators will continue to try to increase competitiveness in the online ad market. Facebook owns four of the top five social media sites; it is too big a target for government competition watchdogs to ignore. As a result, I do see some major share price shocks in Facebook’s future, and I will not be buying the stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie does not own any of the shares mentioned. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Facebook. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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