How do you explain Facebook to someone? If they’re under 25, you tell them it’s the company that owns Instagram and Whatsapp. If they’re big gamers, you tell them it’s the company that owns Oculus. If they’re over 25, they probably know it as the place they uploaded embarrassing pictures to in high school.
Facebook is huge. It’s only been a public company since 2012, but has increased a whopping 764% since then, making it worth over $800 billion. If you had invested $100 at the IPO, you would have $864 now. And that’s in less than 10 years. Though it started as a single website and business, it’s since developed into one of the largest social media and advertising giants in the world.
Does that mean you should invest in Facebook? Or are the days of Mark Zuckerberg ruling the world coming to an end?
Facebook as a company is easy to understand: it owns a bunch of social media sites and apps, including Instagram, Whatsapp, and also Giphy, the website you use to find reaction GIFs.
All of this is financed by advertising — Facebook collects data about you based on your profile to figure out what your likes and interests are, and then gives advertisers the opportunity to target ads to you based on that information. Advertisers are willing to pay a lot of money for this chance — the company made $25 billion from ads in the first three months of 2021 alone.
Facebook doesn’t just get the data from you when you use its apps though. The company actually tracks you across other websites you visit, as long as you have a Facebook or Instagram account (if you want to see all the places it tracks you, here’s the link to see that.) The ads Facebook lets you buy can be seen mostly on Facebook or Instagram, as well as apps and websites that are part of the Facebook Audience Network. That means as long as you have an active Facebook or Instagram account, and use the web, you’re making Facebook money by both providing data and seeing ads.
Like with any company, Facebook’s stock price often moves a lot when the company releases earnings. There are a few key numbers investors focus on: Earnings per share, revenue (which is really mostly advertising revenue), and daily active users. Equally important as the numbers Facebook reveals for the quarter are its predictions for how the rest of the year will go. A forecast of revenue and user growth has the potential to send shares higher even if current earnings disappoint (though how investors react to individual earnings reports is always impossible to really predict.)
Facebook is also part of the big FAAMG stocks — the giant tech stocks that make up a huge part of the U.S. stock market (the other members are Apple, Amazon, Microsoft and Google, now known as Alphabet.) You can read more about those stocks in our guide to blue chips.
Those stocks will often move for other reasons than how the companies themselves are doing. In the past few months, inflation has been a huge worry for investors, leading to the big tech stocks losing a lot of value. The basic idea behind that fear is when inflation rises, big tech companies are going to have to make even more money in the future. Plus, everything they buy to run their businesses will become more expensive. While that’s something all companies deal with, it’s been the FAAMG stocks who have been hardest hit by inflation-led selloffs (a selloff is just a fancy financial term for when stock markets drop in a day, or week.)
Though Facebook is huge, it doesn’t quite have a monopoly on ads yet. Google also offers ads on the web, based on what people search. But between the two companies, they basically control the market. It’s estimated that Facebook and Google together control over 63% of the internet’s total advertising market.
Duopolies (not a knock-off version of the board game Monopoly, but a situation where two companies dominate a market instead of one) might be bad for the market in general, but they’re great for business. While Facebook and Google ostensibly compete with each other, having only one other major competitor helps both of them maintain their huge revenues from ads.
That doesn’t mean there aren’t possible roadblocks ahead for Facebook. For one, consumers and regulators are getting increasingly skeptical about how much power Facebook has over the advertising market, and how it uses its data. Do you remember the Cambridge Analytica scandal from 2018? That’s been only one of a bunch of bad headlines for the company. It’s led to calls for Facebook to be broken up. That would mean turning the huge company into several smaller companies who would need to compete with each other. And while that may be a good thing for the market — at least in the eyes of regulators — it would likely not be great for Facebook’s share price.
Long-term, Facebook will also need to prove it has staying power. History is full of tech companies that once dominated a space, before fading away as new technology replaces them. Microsoft and IBM, who both used to control the computer market, are great examples of this. So while Facebook is doing great right now with its ad business, new competitors and technologies might pop up that change the market completely.
In essence, a bet on Facebook is a bet that the company will either be able to continue enjoying its dominant position in the advertising market, or that it’ll be able to adapt to the market if things change.
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