Facebook recently reported solid earnings thanks to pandemic-driven traffic and ad sales. But will the increasing focus on user privacy make it difficult for Facebook to grow its revenue? Anthony Okolie speaks with Andriy Yastreb, Telecom and Media Analyst, TD Asset Management, about the bull and bear case for Facebook.
- Yes, Tony. It's actually quite surprising for a company of that size, but it's growing really fast. And this growth is driven basically by consumer activity, and digital advertising, and advertising dollars moving from real world to digital world. And if you look at Bloomberg's consensus, the expectations are that Facebook will grow revenue by 34% this year and buy another 19% next year.
- Next, the company has a lot of exposure to future technology growth.
- Yeah. And I think one area that really stands out is virtual reality and augmented reality. It's an area that has been growing pretty nicely for Facebook recently. If you look at this chart, you can see that last two quarters, there was a big jump in this other revenue that includes virtual reality. And what accounts for that is basically that Facebook launched Oculus 2 virtual reality headsets late last year. And that drove revenue growth at triple digits over 100% year on year.
And what's really exciting about this opportunity, Facebook noted that applications for virtual reality are starting to expand from just gaming and entertainment, where they have been in the past, to more serious applications. For example, collaboration tools and productivity tools for businesses. So I think the bottom line here is that virtual reality is becoming more real, and Facebook is one of the best ways to get exposure to this trend.
- OK. And, finally, Facebook shares are not expensive.
- Yeah. So if you look at the multiples where Facebook is trading, it's trading in 20 times price-to-earnings multiple on next year's earnings. And if you compare it to the market, the S&P 500 is basically trading at the same multiple. It's clear that Facebook has much better long-term growth prospects than the average company in the S&P 500. So from that perspective, Facebook is underappreciated here.
- So some strong factors for Facebook being bullish. Now we'll take a look at the bear case. First, Facebook faces a lot of regulatory risks.
- Yes, so regulatory risk is definitely the number one risk for Facebook. The company is subject to a number of antitrust investigations and lawsuits around the world. And it's also a target for political issues and for more regulation, potentially. And if you look at the history, over the past five years, at least, this has been an overhang for the stock. And most likely, it will continue to be an overhang for the next five years.
- Next, the company is still dependent on the smartphone ecosystem.
- Facebook has been very successful precisely because they were able to access the data from our smartphones, learn what we're doing, and target the advertising for customers in a more precise way. And Apple recently announced the big change where they will be reducing the ability of companies such as Facebook to collect their customer data and to use it for targeted advertising.
So I think, from that perspective, it's a very new risk. This software update is being rolled out just this quarter. It's something completely new and is going on as we speak. And one thing to note is that everybody will be impacted by this. Everybody who's not Apple, their ability to collect customer data will be impacted. But Facebook, on a relative basis, is well-positioned relative to a lot of other companies because they have a lot of first-hand data from their own apps.
- OK. And finally, talk to us about the increasing competition, especially in the tech space.
- Yeah. So since Facebook existed, since it was launched, there was always this concern that there will be a new app, or new website, that will come and it will eventually steal Facebook users. Well, we've seen Twitter, and Pinterest, and most recently TikTok, up here gaining a lot of customers. But at the same time, Facebook is doing just fine. I think there's always the risk of innovation and disruption for any company. And the best defense for companies against that is to innovate on their own. And Facebook I think has proven over time that it's able to innovate as well.
- OK. Now I want to see how this all nets out for you. But before I do, I'm curious about the Facebook digital coin, Diem, and how that sort of fits into your overall view.
- So I think on Diem, which is basically Facebook's project to have their own cryptocurrency, it's still very early. It's still very small for Facebook overall, and there's still a lot of uncertainty around it. So the way I view it, I view it as basically a free option for Facebook to develop their own currency and establish their own ecosystem. But it's still very early days.
- OK. So with all these factors in mind, where do you net out on Facebook?
- Look, I think there's a lot to like here on Facebook. The company is performing really well, growing really fast. It's not expensive. But at the same time, there is always this overhang from regulatory risk. There's always this near-term worry about their ability to collect the data and target their customers. So for the recent past, Facebook has been range bound because of that.
- Andriy, thanks very much for your time.
- Thank you, Tony.