Ad Industry Recovery sets Facebook Up For further Growth, Says Top Analyst

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Facebook (FB) is once again under pressure for its handling of misinformation and hate speech following the 2020 election results.

The social media giant is no stranger to such shenanigans; the company is practically a controversy magnet. However, it is also well versed in shrugging off such headwinds.

Facebook faced pressure in the summer due to an ad boycott from well-known brands. Apart from the temporary snub which appears to have had little lasting impact, the concern for Facebook’s ad revenue stream – its primary source of revenue – was based on Covid-19’s debilitating impact on the ad industry. But even as parts of the world prepare for further lockdowns, the industry’s recovery is set to provide Facebook with further growth, says J.P. Morgan analyst Doug Anmuth.

In Q3, Facebook’s ad revenue increased by 22%, beating the Street’s call for mid-teens growth “as FB saw meaningful inflection from July into Aug-Sept.”

In the quarter, ad revenue “accelerated” across the globe and Facebook now has over 10 million advertisers using its services. Facebook expects the growth to further accelerate in Q4, causing Anmuth to raise his projected growth from 19% to 26%.

However, heading into 2021, there are several uncertainties, including the impact from Apple’s changes to its ad tracking technology in iOS 14. The changes will most affect Facebook’s Audience Network (FAN), which has a “high exposure to app-install ads.” Although the 5-star analyst notes FAN makes up just a small chunk of the company’s overall business.

On the other hand, there should be additional opportunities from “newer products and surfaces.” Anmuth is keeping a close eye on Facebook’s e-commerce initiatives FB Shops & IG Checkout. E-Commerce integration won’t have much of an impact in Q4, but the analyst expects both segments will “drive more ad $ in 2021.”

Facebook has other ad monetization possibilities, too.

“We believe Stories continues to lag Feed in ad load, pricing, & number of advertisers, suggesting room ahead. FB is testing ads within Groups & we’d expect them in Reels as well,” Anmuth further said.

All in all, Anmuth rates FB an Overweight (i.e. Buy), while slightly increasing the price target from $315 to $330. The new figure implies a 20% upside potential from current levels. (To watch Anmuth’s track record, click here)

Across the Street, almost all agree with the J.P Morgan analyst. Barring 2 Holds, all 33 recently posted reviews recommend the stock a Buy. Given the $322.73 average price target, the analysts expect FB to rise by 16% over the next 12 months.

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