Facebook Stock's Strong Rally In 2019 Shows It Still Dominates The Market

Facebook (NASDAQ:FB) (NASDAQ:FB) stock is flying high again. After a disastrous 2018 in which this social media giant lost more than 40% of its market capitalization, its shares are the second-best performer in the group of the top five U.S. tech firms known as FAANG this year. And while the stock fell almost 2% yesterday, after 4 straight days of gains, it is still 29% up in 2019, climbing from $131.09 on Dec. 31 to $169.13 at Thursday's close.

The stock’s biggest bears are probably scratching their heads and trying to understand what’s behind this powerful rally. On the surface, nothing has changed for Facebook, which operates the world’s largest social communities and messaging services, including Instagram and WhatsApp.

Facebook Weekly Chart

The company’s CEO and founder, Mark Zuckerberg, is still busy doing damage control after it emerged that his main platform, Facebook, had been manipulated for political gains, letting individuals and groups used it to spread misinformation. The biggest shock came after the Cambridge Analytica scandal last year, which raised questions about the company’s privacy practices and exposed weakness in its business model, which relies on monetizing user data.

These issues were so big that they triggered a widespread backlash against Facebook and prompted many investigations into the company. While these probes by the U.S. and European agencies and politicians are still underway, investors’ mood has suddenly turned positive on its shares. Facebook has now recovered much of its lost ground, with analysts’ consensus forecast calling for another 15% surge in the next 12 months. That positivity, in our view, stems from two factors.

First, despite all the setbacks of the past year, Facebook’s core platform is still growing. At its fourth-quarter presentation on Jan. 30, the company surprised even its most ardent critics by showing a slight increase in the average number of people who use Facebook or its Messenger app daily in both North America and Europe—two markets where the backlash against it was strongest.

Globally, daily active users averaged 1.52 billion in December, rising 9% from a year ago, while monthly active users were 2.32 billion, an increase of 9% year-over-year.

Second, the Facebook platform is still as valuable for advertisers as it was before all the controversies and scandals erupted. In the fourth-quarter, revenue rose more than 30%, while its operating profit margin was a stunning 46%.

Dominance Over Digital Ad Market

This robust growth shows that the giant social network is still maintaining its dominance over the digital ad marketplace where companies have no option but to go for the duopoly—Google (NASDAQ:GOOGL) (NASDAQ:GOOGL) and Facebook, the two companies which still collect the most user data and have the capabilities to direct their ads to the right audience.

It would be naive to discount the risks of possible regulations facing social media companies in the coming months and quarters, but it’s also important to recognise that Facebook hasn’t lost its power and still has many options for growth.

While politicians and regulators are busy figuring out how and when to regulate social networks, Facebook is spending massively to improve its privacy practices and introduce new features which could help make up for the lost revenue from its core feed, and is building up new following through its video-and-photo diaries, a new section which displays TV-like web videos, as well as its hardware for the home.

In a blog post on March 6, Zuckerberg shared his idea of building a privacy-focused messaging and social networking platform. He said:

“As I think about the future of the internet, I believe a privacy-focused communications platform will become even more important than today's open platforms.”

Going in this direction, Facebook plans to offer encrypted messaging across all of its major products and allow people to make private conversations ephemeral, according to his post. Around these private communities, it plans to develop value-added products such as electronic payments and e-commerce.

Bottom Line

Making Facebook acceptable to regulators, politicians, and its users is still very much work-in-progress. Amid this transition, it’s also becoming increasingly clear that advertisers have no other method of reaching their audiences that’s as powerful as Facebook is. That means the worst-case scenario that the market had priced into Facebook stock last year was wrong, and the shares' recent rally is reflecting that reality.