What will earnings mean for Facebook’s share price?

Facebook’s [FB] share price gained 4.3% over the final quarter of 2020. The social media giant saw gains on 5 November when a likely Joe Biden US presidency still appeared coupled with the prospect of a Republican-controlled Senate.

This would have offered Facebook’s share price a cushion against Democrat tax increases, expected to disproportionately impact Big Tech. However, it emerged over the following weekend that both Senate seats in Georgia would be decided in a January run-off that could (and eventually did) give Democrats control of both houses, so Facebook’s share price gains were short-lived.

Two days after Joe Biden’s inauguration as US president on 20 January, CMC’s Big Tech theme ETF screener showed losses of 0.15% year-to-date for both the major ETFs tracked (the Invesco QQQ Trust and the US Fang Plus – Dec 2020), despite 17.1% gains for the S&P 500.

In the previous six months, Facebook’s share price has gained 12.9%, having hit and fallen from record highs in the meantime. Facebook’s share price reached an all-time high of $304.67 on 26 August, driven principally by the company’s activities in the e-commerce space.

While legal and political woes have been weighing on Facebook’s share price recently, the e-commerce avenue is a profitable way forward. What can investors expect from Facebook’s share price when the company announces its Q4 earnings on 27 January?

The e-commerce curve

In May 2020, Facebook’s share price was boosted by the unveiling of Shops, designed to “make it easy for businesses to set up a single online store for customers to access on both Facebook and Instagram.” Lloyd Walmsley, an analyst at Deutsche Bank, predicted that Shops could generate $30bn revenue in a bull case.

However, of the $21.47bn revenue reported for Q3 2020, advertising accounted for $21.22bn while “Other” streams (including direct e-commerce takings) accounted for just $249m. Advertising, in other words, currently comprises almost 99% of Facebook’s revenue. Non-advertising revenue in fact fell 7.4% year-over-year. This is despite last August’s announcement of a second partnership with BigCommerce to launch a similar e-commerce feature for Instagram.

Dave Wehner, Facebook’s CFO, credited “strong advertiser demand resulting from the accelerated shift from offline to online commerce” for the increase in advertising revenue from Q2 to Q3 2020.

Globally, the ecommerce industry’s sales grew 27.6% to $4trn during 2020, with analysts estimating that the coronavirus pandemic has accelerated the shift from in-store to online shopping by five years.

So while its e-commerce arms may be some way from generating significant direct revenue, Facebook’s share price may benefit from the social media giant’s efforts to couple its fortunes with the rapidly expanding e-commerce industry more widely.

Fuelling the future

Despite Zacks Equity Research predicting Facebook’s EPS to rise 25.4% year-over-year to $3.21, the January earnings report will not yet show signs of the shift.

Advertising demand over the Christmas period will be the biggest factor in Q4 earnings, and any impact direct selling has on the expected $26.26bn revenue (up 24.6% year-over-year) could come mostly from the Oculus 2 VR headset, rather than Facebook’s e-commerce arm. It is in the majority-advertising revenue stream, however, that the e-commerce seeds have been planted.

The key to Facebook’s share price lies in the synergies Shops and similar partnerships provide to the company’s many existing e-commerce advertising customers. Shoppers who make purchases based off in-app ads without leaving the platform (whether that’s Facebook, Instagram or WhatsApp) increase conversion rates and performance measurements for Facebook’s advertisers. This increases Facebook’s value to these customers, driving advertising revenue even without Facebook taking a cut of the transactions.

WhatsApp, which has proven difficult to monetise thanks to widespread concerns over data privacy, is set to see a big e-commerce expansion in India. The Reliance Industries [RELIANCE] e-commerce app JioMart is set to be embedded into WhatsApp within six months, as Reliance shifts away from its dependence on the oil and energy industries. India’s 400 million-plus WhatsApp users will be able to buy through JioMart (in which Facebook owns a 9.99% stake) without leaving the app. Expect further rollouts of this model going forwards.

As Facebook’s own online retail ecosystem becomes more integrated, the wider e-commerce space is expected to see continued growth. Some estimates suggest the sector could be valued at as much as $5trn by 2022.

Facebook will drive this growth while taking its own, increasingly large, slice of the pie. In the second half of 2020, the time spent on a mobile device by the average American overtook the amount of time spent watching TV, and four of the five most diverting apps (by time spent) are owned by Facebook — including WhatsApp, Instagram and Messenger.

An e-commerce boom is underway, and Facebook’s share price could well be one of the major beneficiaries.