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Facebook Takes on TikTok, But That’s Not Why It’s a Buy

Bret Kenwell

Facebook (NASDAQ:FB) is fresh off better-than-expected earnings. After popping higher on July 31st, rallying 8.2% to new all-time highs, Facebook stock slid for three straight trading sessions. 

FB Stock Will Power Through Short-Term Headwinds
FB Stock Will Power Through Short-Term Headwinds

Source: rvlsoft / Shutterstock.com

Shares tried to rally on Wednesday Aug. 5, but ultimately ended slightly lower on the day. That comes as the company unveiled a competitor to TikTok, the rapidly growing social media platform out of China. 

The TikTok situation presents a unique set of circumstances. First, there has been no real competition to emerge for several years in the social media space. LinkedIn is more of a professional and networking site, while Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Google+ has been irrelevant for years. 

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While efficient for advertisers, Pinterest (NYSE:PINS) doesn’t really have a social element to it. In short, the space is dominated by Facebook and its Instagram property, Twitter (NYSE:TWTR) and Snap (NYSE:SNAP). 

Now though, Microsoft (NASDAQ:MSFT) – which is the owner of LinkedIn – could re-emerge as a player in the social media space if it does indeed acquire TikTok’s U.S. operations

TikTok vs. Facebook

TikTok is facing a situation where it must IPO or sell itself. Otherwise it faces the potential to be banned from the U.S. To be honest, being banned from the U.S. would be the best outcome for Facebook. 

Instead though, it’s likely that Microsoft will acquire the company and likely pay a pretty penny for it. Interestingly, it should help drive up the value of Twitter, Snap and Pinterest, although it’s unclear if it ever will. 

In any regard, Facebook should remain relatively impervious regardless of TikTok’s outcome. 

When Snap had momentum with its “Stories” feature, Instagram rolled out the same feature and hit almost instant success with it. Now, Instagram is rolling out a competitor to TikTok, with Reels:

Reels invites you to create fun videos to share with your friends or anyone on Instagram. Record and edit 15-second multi-clip videos with audio, effects, and new creative tools.”

A deep-pocketed Microsoft pushing TikTok forward could be a home run for the Windows-creator. But Facebook will keep on rolling regardless.

Facebook Stock Has Momentum

Why will Facebook be fine? Because the business has momentum. Just look at all the press the July boycott received. Yet that didn’t stop the digital ad giant from hammering earnings and revenue results

Earnings of $1.80 per share easily beat expectations by 43 cents, while revenue of $18.69 billion coasted past estimates by more than $1.3 billion. That’s despite sales growing “just” 10.7% year-over-year, which is actually slow for Facebook. 

Just think of how impressive that really is, though. Facebook grew sales almost 11% in a quarter – which started in April – that was plagued by the novel coronavirus. Despite Covid-19 weighing on digital ad spending, Facebook still found a way to grow. 

Then you start to get into its other assets, starting with the growth. Consensus expectations call for 13% revenue growth this year, followed by an acceleration up to 24% growth in 2021. Earnings are forecast to grow an impressive 23.3% this year and 27.4% next year. 

At current prices – even near all-time highs – Facebook stock trades at a reasonable 31 times this year’s earnings. Given its superior growth, shares deserve a premium valuation, particularly given the fact that the company will likely top this year’s earnings estimates. 

Facebook has come up short on consensus earnings estimates just once in the last five years. That came two quarters ago when it missed expectations by a penny per share. 

Another asset? Its balance sheet. Despite paying a hefty fine and taking a sizable stake in Reliance Jio, the company boasts cash and equivalents of $58.2 billion. That’s against no long-term debt. Current assets of $68.1 billion smash current liabilities of $11.3 billion. 

In short, this is one of the strongest balance sheets on Wall Street.


Last But Not Least

Daily chart of Facebook stock price.
Daily chart of Facebook stock price.

Click to Enlarge
Source: Chart courtesy of StockCharts.com

As if the balance sheet, growth and strong moat aren’t attractive enough, Facebook stock has been a stud. 

The latest rally sent shares to new highs, and even though the stock has been consolidating, it’s hard to get too bearish. Shares are coiling on the shorter timeframes, while the stock is revisiting prior pre-earnings resistance.

If this area holds as support, look for a rotation back up to and over the current high at $273.79. On a deeper dip, look for a test of the 20-day and 50-day moving averages between $236 and $240.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.

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