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Facebook Shop a No Brainer for Advertisers, Says 5-Star Analyst

Global crisis or not, some of the world’s biggest companies’ march toward ubiquity appears unstoppable. Facebook’s (FB) V-shaped recovery since the mid-March collapse has resulted in a new all-time high, with the landmark being achieved on May 21.   

According to SunTrust Robinson analyst Youssef Squali, Facebook’s latest venture is about to propel it even further ahead.

The social media colossus recently unveiled Facebook Shops, its new eCommerce arm. Businesses are now able to use Facebook as a digital shopfront to sell their products to customers, who can do all of their online shopping directly through Facebook or Instagram without ever leaving the FB eco system.

Facebook already made its debut into the eCommerce space with the addition of Marketplace in 2016. The feature now attracts over 800 million MAUs (monthly active users), but the C2C focus has meant it has remained unmonetized. The new Shops, according to Squali’s analysis, indicates “every incremental 1 million SMEs (small to medium enterprises) could drive ~300bps of top line growth.”

So, how will Facebook make money from the new addition? Well, for one, through fees. Facebook will charge a 5% fee for sales over $8, or $0.40 otherwise on each transaction. However, this is not really where Facebook expects to monetize the platform, as it will use the fees to cover payment processing, taxes, and development.

The real opportunity is in a segment from which Facebook already derives much of its revenue – through advertising. Squali believes using Facebook Shop will be a no brainer for advertisers who “will be more willing to spend on the platform given the likely improvement in conversion, due to the seamless checkout and more accurate ROI measurability.”

Squali added, “We believe this approach for a B2C offering should start yielding green shoots relatively quickly, as FB converts a subset of the ~160 million mostly free and mostly small businesses on its platform into paying advertisers. It should also benefit from higher ad prices driven by greater advertiser bid density, the ability to close the loop and improve ROAS visibility with higher conversion rates from a fully integrated checkout.”

Accordingly, the 5-star analyst has a Buy rating on Facebook, accompanied by a $245 price target. The analyst forecasts upside potential of 6% from current levels. (To watch Squali’s track record, click here)

The view from the rest of the Street is similarly bullish. Facebook’s Strong Buy consensus rating is based on 31 Buys and 4 Holds. Yet, at $243.21, the average price target implies the analysts expect upside potential of 5% in the coming months. (See Facebook stock analysis on TipRanks)

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