Should You Buy Facebook (FB) Stock?

With more than 3 billion people using its services every month, nearly half the world population uses Facebook or its products. Among the six most popular social media platforms in the world, Facebook owns three: WhatsApp, Instagram and, of course, Facebook itself.

With a pandemic continuing to rage across the globe, people are turning to Facebook to stay connected with their loved ones. Considering all of these factors in Facebook's favor, it should come as no surprise that the company was firing on all cylinders this quarter, but bad press and angry advertisers are putting a damper on Facebook's bright future.

So is Facebook a good stock to buy? Let's take a look at some of the pros and cons of Facebook stock.

Facebook Stock at a Glance

The story of Facebook is a familiar one by now: a brilliant young Harvard student named Mark Zuckerberg created a website in his dorm room in February 2004 and only allowed Ivy league students access. From there, he watched his creation explode in popularity. By 2007, Facebook garnered a valuation of $15 billion; and by 2010, it was worth $41 billion. When the company went public in May 2012 at $38 a share, it was worth a staggering $104 billion.

The company had more than 1 billion monthly active users by December 2012. But even more importantly, Facebook acquired Instagram for $1 billion in August 2012, which at the time had a little more than 100 million registered users. Today the platform has well more than 1 billion and counting. Instagram's focus on photographs and mobile users not only proved prescient, but also paired well with Facebook's growing mobile base: In July 2019, 94% of Facebook's advertising revenue came from mobile users.

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Finding "up and coming" companies with services that complement its own is an effective strategy for Facebook. Following its purchase of Instagram, FB acquired WhatsApp in 2014 for $19 billion. Back then, WhatsApp was one of the fastest-growing companies in the world, and Facebook was happy to not only gain an incredibly popular new service, but also to remove WhatsApp as a competitor for Facebook Messenger.

This too would prove to be a prescient move for Facebook and one that worked out well for the company and its family of apps. In fact, according to App Annie, the four most downloaded apps in the world between 2010 to 2019 were Facebook, Facebook Messenger, WhatsApp and Instagram, in that order.

But does a company as big and as popular as Facebook still have room to grow?

Pros of Buying Facebook Stock

According to its second-quarter earnings announcement, the largest social media company in the world continued to grow larger, with Facebook's daily active users, referred to as DAUs, increasing 12% year over year to 1.79 billion people, as of June 30. Meanwhile, Facebook's monthly active users, or MAUs, increased by 12% as well to 2.7 billion as of June 30.

People continue to use Facebook from home to stay connected with the outside world. Facebook itself notes that these higher user numbers "reflect increased engagement as people around the world sheltered in place and used our products to connect with the people and organizations they care about," according to the company's recent earnings report.

While Facebook doesn't break out specific user numbers for Instagram, WhatsApp and Facebook Messenger, it does consolidate user numbers for both services, along with Facebook itself, in its family daily active people, or DAP, and family monthly active people, known as MAP, measurements. Both enjoyed a strong second quarter, with DAP increasing 15% year over year to 2.47 billion people, while MAP increased 14% to 3.14 billion people.

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These numbers are all-important to Facebook's lifeblood: advertisers. Facebook relies on advertising for revenue, and to convince advertisers to spend money, Facebook must illustrate that it can continue to bring in new users and keep them on its platforms. In doing so, the company collects more data on those users, which it can then pass along to advertisers to help them target exactly which customers their ads will be most effective with. With its user count continuing to increase, Facebook is sitting pretty, but reliance on advertising can be a double-edged sword (more on that later).

Along with this impressive growth in users came commensurate increases in revenue and earnings, both of which beat analyst expectations. In the second quarter, Facebook's revenue grew 11% year over year, while earnings per share rose to $1.80 from $0.91 in the same quarter last year -- a whopping 98% increase.

While advertising revenue did account for 98% of Facebook's revenue this quarter, the remaining 2% shouldn't be overlooked. Some of the other revenue came from Oculus headset sales as well as Portal device sales. While these sales may not move the needle for Facebook, it can't hurt that the company is making small bets on the side.

The global pandemic has made it clear that while only strong companies will survive, essential companies will thrive. Facebook has been one of those essential companies since the virus began to spread around the world in early 2020, and this quarter's earnings reflect the company's continuing popularity. But there are still clouds brewing over Facebook, and most of them began to gather this quarter.

Cons of Buying Facebook Stock

Facebook has never shied away from the spotlight but hasn't always walked away from it looking good. In 2016, the company came under intense scrutiny for how it handled advertising and news feeds during the presidential election. In 2018, Facebook's image took another beating when it was revealed that Cambridge Analytica had utilized data from its users without their consent, sparking a #DeleteFacebook campaign.

Now, like clockwork, there's a new hashtag for Facebook to worry about: #StopHateForProfit. Beginning in early July, big brands including Unilever ( UL), Verizon Communications ( VZ), Starbucks Corp. ( SBUX), among others, announced they would pull their advertisements from Facebook until the company took a firmer stance against hate speech on its platform.

For what it's worth, Zuckerberg doesn't seem worried, stating in prepared remarks that "some also seem to wrongly assume that our business is dependent on a few large advertisers. While we value every single one of the businesses that use our platforms, the biggest part of our business is serving small businesses."

While the #StopHateForProfit campaign didn't take a bite out of Facebook's second-quarter earnings, investors should pay close attention to how long into the third quarter this lasts to get a better idea of how Facebook will perform for the rest of the year.

That brings up another issue that Facebook is facing: a global decline in advertising. Around 98% of the company's revenue came from advertising, which means Facebook has most of its eggs into one basket.

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Amid economic uncertainty, if not the beginning of an outright recession, many businesses traditionally cut their advertising spending first to save money. Considering that Facebook, along with Alphabet ( GOOGL, GOOG), controls around 70% of the digital advertising market in the U.S., this should be deeply concerning for Facebook and its shareholders.

While Facebook wasn't public during the Great Recession, many companies saw dramatic declines in advertising spending during that time. If Facebook begins to experience the same sort of decline, investors will need to brace themselves for the company's continued growth to stall.

Finally, while user DAUs and MAUs grew this quarter, don't expect Facebook to keep up this pace. As Chief Financial Officer Dave Wehner noted during the earnings call on July 30: "We are seeing signs of normalization in user growth and engagement as shelter-in-place measures have eased around the world, particularly in developed markets where Facebook's penetration is higher. Looking forward, as shelter-in-place restrictions continue to ease, we expect the number of Facebook DAUs and MAUs to be flat or slightly down in most regions in Q3 compared to Q2."

Advertiser boycotts and declines in advertising spending, in general, could very easily become a one-two punch that leaves Facebook reeling in the next quarter -- and especially in the fourth quarter when holidays usually mean an increase in ad spending.

Bottom Line: Should You Buy Facebook Stock?

There are a few cons working against Facebook, but its biggest pro is how well-established it is. Size matters in the world of social media, and whichever company can keep the most eyeballs on its homepage wins advertising dollars, even if it doesn't win the advertiser's hearts. Facebook has taken a lot of missteps in recent years, but the steps it took early in its history to establish itself as the most dominant social media company in the world will insulate it from all but the most negative bad press.

Users will probably still give Facebook a "like" -- which is exactly why investors should as well, at least in the short term. Facebook is an essential business that is keeping the world connected during a global pandemic. Whether advertisers like it or not, the company's popularity will keep them coming back and lining Facebook's pockets. Though near-term headwinds may slow the company's growth, Facebook isn't going anywhere anytime soon.

In the longer term, however, the trends seem to be working against Facebook. A history of acquiring upstart rivals and folding them into the Facebook family (or simply copying their business, a la Snapchat) means that it's unlikely the company will let any newcomers sneak up on it. But big Big Tech rivals like Alphabet with YouTube and Amazon.com ( AMZN) with Twitch continue to attract large, young audiences that Facebook can't ignore. It also seems less and less likely that lawmakers will ignore Facebook's antics, and only time will tell if they bring the hammer down on the world's largest social media company.

Mark Reeth is a contributing writer for U.S. News & World Report, where he writes about anything and everything to do with investing. Prior to U.S. News, Mark covered consumer goods, technology, and telecom stocks for The Motley Fool. When he's not writing about investment strategies Mark is busy running his own small business, which has given him a better appreciation of the personal finance trials and tribulations of entrepreneurs everywhere.

Mark is a graduate of the College of the Holy Cross, where he studied History and Education. You can connect with Mark via LinkedIn, or follow him on Twitter.