Stock of the Week
Nasdaq Symbol: FB
Industry: Social Media
Price as of 4/4/20: $154.18
The coronavirus has caused a bear market as the US government has deliberately closed down large portions of the economy to slow the spread of the virus, preserve lives and not overwhelming the healthcare system. The S&P 500 fell 35% through the third week of March when Congress stepped up and the Federal Reserve broken out their 2008 financial crisis playbook to do, "whatever it takes" to keep the financial markets around the globe working. The moves seemed to have worked in the short term as the S&P 500 bounced nearly 20% off the lows. Picking stocks in this environment is not easy as many companies could go out of business without help and assistance from Federal programs. One sector holding up well is technology thanks in part to their low debt levels, strong cash flow and large cash levels. This week we will highlight a tech stock in the media space. The stock of the week is Facebook.
Facebook's stock is down 30% in the last month due in part to slowing ad business, but Facebook's balance sheet can weather this storm. The company has $54 billion in cash and $43 billion net of debt or $17.80 a share in cash. The company also generates an extra $15 billion in free cash flow in a good year which keeps adding to their coffers. Recently, Facebook demonstrated their financial strength by announcing they will hire 10,000 additional workers for their product and engineering teams by the end of the year while also initiating a $100 million small business grant program of which $40 million will be distributed among 10,000 small businesses affected by the coronavirus.
It is true Facebook's ad business will take a hit. Small businesses account for as much as 40% to 45% of Facebook's ad business. A recent surveyed of nearly 400 ad buyers indicated the current ad downturn will be worse than the financial crisis in 2008. Digital spending for the March-to-June period could be down as much as 33% with traditional media ad spending down 39%. Currently, Facebook's estimated market share of the digital ad space is 22% and 66% for the social media market.
But hopefully, the overall ad business downturn will be relatively short. The same respondents in the survey expect conditions to improve at least a little in the second half of the year. Advertisers love using Facebook with their roughly 2.9 billion monthly active users. Some suggest ad spending could bounce back as early as this fall or early next year as a flood of delayed events like the Olympics bring advertisers back into the fold.
With the recent pullback, Facebook's stock trades near a two and half year low. The stock has never been particularly cheap. The stock currently trades for 15 times earnings and four times sales. Estimates will come down further in the coming weeks and months, but the ad spending business will eventually come back, and in the meantime, Facebook will continue to figure out ways to monetize their other businesses which include Instagram with a billions users, WhatsApp with 2 billion users, Oculus VR, Facebook Dating, Facebook Local, Calibra and some of the other 40 companies they have acquired in the last 15 years. For long term investors, Facebook's stock could be a good one in the coming years.