Facebook Likely To Rebound Once Coronavirus Fight Stabilizes
It seems like most of the United States is now working from home, furloughed, unable to go to restaurants and stores, sheltering in place, some combination of the above, or in some other kind of state that gives them a lot more free time and/or flexible access to Internet services. Despite the momentary boost to activity and usage that many of these companies will likely experience from these conditions these stocks still have all drastically fallen amid the past month's downturn in the markets.
As I've described previously, the key to finding companies even remotely worth investing in amid this still-imploding coronavirus-spurred downturn is to look for which companies will be able to weather the turmoil without resorting to stock-price-destroying measures such as coercive government bailout terms, stock dilution, or even bankruptcy.
Facebook, as of Wednesday's close down 33.1% at $149.96 from its 52-week high of $224.20 just a month ago, appears to be a company exceptionally well-positioned to survive from this crisis and thrive in and around the aftermath. The company has a boatload of cash and a seemingly unbreakable economic moat that means that when advertising dollars return amid an economic rebound that it will similarly balloon again as well. Furthermore, it is geared to, like certain other companies that benefit monetarily off of remote work and interaction, to be cushioned by the coronavirus downturn perhaps more than its stock decline would indicate.
"Social Distancing" Fuels A Social Network For Facebook
"Social distancing" is now being increasingly implemented by Americans far-and-wide in a bid to reduce the spread of coronavirus. Social distancing is essentially a reduction in in-person, close-quarters contact and association such as at events, meetups, parties, conferences, meetings, and more. While initially being implemented voluntarily by Americans now many U.S. states have implemented legal orders requiring this by shutting down everything from casinos to restaurants. For a company like Facebook which benefits off of people spending time on its platform rather than, say, together in-person, this is a immensely beneficial to the user activity that is the primary fuel for the social media giant.
Facebook stock nonetheless has collapsed with rest of the market - for comparison the Dow is down 32.7% from its all-time high as of Wednesday's close, slightly better than Facebook's decline. This is primarily fueled by the domino effect currently roiling the markets as the collapse of one industry leads to increased stresses and possible implosion of a different but interrelated and interconnected industry.
In Facebook's situation, this crisis case is due to worries about the flight of advertising dollars from companies of all sorts as they either reduce their attempts at selling amid a decline in demand or due to closing entirely for the time being. A recent forecast reduced the 2020s expected $227 billion in U.S. online advertising spend to $224 billion due to coronavirus just at this stage so far of the fight against the pandemic.
"Cash Is King" And Facebook Has Lots Of It
I remain optimistic though that Facebook can handle any decline for the moment in terms of advertising dollars as a result of many businesses shuttering their doors and no longer, therefore, spending money on the platform. After all the company's most recent financials from its Q4 2019 earnings report showed it had $19.079 of raw cash on hand and $66.225 billion in total current assets. This is a company so well-financed it is, laudably, giving its 45,000 full-time employees each $1,000 and a likely additional force-wide performance bonus amid the coronavirus downturn and that spent $4.2 billion on share buybacks in 2019.
In terms of financials the company made $36.314 billion in net operating income in 2019 alone - it would be unfathomable for all that profit to go negative too much and even the $3 billion online advertising hit for the entire U.S. market predicted by the above-cited study would be just a drop in the bucket to Facebook's net income. Net financing spend was $7.29 billion, the bulk of that from stock buybacks that are easily stopped, in 2019 and net investing spend was $19.864 billion, $23.910 billion of that cost from purchasing marketable securities that are a current asset. Few companies could dream of such a financially sound situation.
It's About Survival, Plain, And Simple
As explained above it is likely Facebook will face a downturn in revenue from the ancillary downturn as a result of the coronavirus pandemic. However the hit will be moderate and with a cushion as user activity increases and some companies may even attempt to increase advertising to make sales, such as through online delivery, amid decreased natural demand and closed stores. This reduces the likelihood of an earnings collapse for Facebook even if the coronavirus pandemic is prolonged let alone any liquidity or capital concerns.
At this price Facebook, therefore, looks very appetizing for an investor who can handle potential increased turbulence as Facebook ebbs and flows with the rest of the market amid coronavirus. I believe however that once the coronavirus fight stabilizes Facebook will stabilize too and perhaps at a faster rate than some other sectors that face serious liquidity and bankruptcy concerns. This increased sector bifurcation already appears to be taking place as investors attempt to differentiate between companies positioned to survive and those not - and I think Facebook will be one of the former.
Disclaimer: These are only my opinions and do not constitute investment advice.