This story originally appeared on Best Stocks
Why experts think that Facebook stock split is inevitable
At press time, Facebook has not yet announced a stock split. However, investors think that a split could be inevitable shortly to combat the company’s overwhelming market power. Facebook is currently valued at $500 billion, and there is no other company within 1.5 times of their value. This creates a monopoly that leaves little opportunity for growth for anyone surrounding them or trying to enter their industry. Therefore, dividing the shares of Facebook’s stock would significantly impact its ability to dominate its competitors and maintain its current monopoly.
Facebook beat third-quarter earnings per share estimates on Monday, but it fell short on revenue and a few user metrics. Shares rose in premarket trading Tuesday, likely due to Snap’s disappointing earnings report earlier this month, which raised concerns about the digital advertising market.
This weakness was evident in Facebook’s earnings report and played a significant role in several price target reductions from major Wall Street analysts. Those targets, however, still show double-digit upside for the stock, and analysts maintained buy or buy-equivalent ratings.
In this scenario, a Facebook stock split could be a way for the company to try and keep the future shareholders happy. But is splitting Facebook’s stock such a good idea?
The new stocks will be created by doubling the number of shares and then halving the share price. So, for example, if you owned 100 shares worth $50 each, you would own 200 shares worth $25 each after the split. You can then trade those stocks for an even higher value in a few months.
Some investors think that this move will reduce the overall value of Facebook’s stock, while others believe that this is an intelligent decision for profit in the long run.
Here are some of Facebook’s notable price target reductions. Before the earnings report, the stock closed at around $329 per share on Monday.
Morgan Stanley: down from $400 to $365 per share.
JPMorgan: $390, down from $450.
Goldman Sachs: $445 per share, down from $455 previously.
The effects of Apple’s new privacy policies and economic disruption on the ad market were a key story for Facebook this quarter. Still, analysts said those issues wouldn’t be enough to change the long-term bull case.
“We believe much of this is transitory, and we see multiple reasons why FB’s continued (and still-accelerating) investment will enable them to maintain high teens to 20′s [year-over-year] ad revenue growth and remain destination 1 or 2 (along with [Google]) for incremental online ad spend,” Morgan Stanley analyst Brian Nowak wrote in a note.
The company also announced the formation of a new business unit to demonstrate its progress on long-term projects such as the metaverse. According to Goldman Sachs analyst Eric Sheridan, the change should be beneficial to Facebook.
“With the upcoming breakout of Facebook Reality Labs (which management estimates will result in a $10 billion operating loss in 2021), we see FB shares beginning to take on a sum-of-the-parts approach akin to transitions Alphabet and Amazon have undergone in prior years & as a driver of share outperformance,” the Goldman note said.
Similarly, Bank of America analyst Justin Post cited the new business division as a reason for raising his price target on the stock to $400 per share from $385, despite lower earnings per share estimates for 2022.
Teen user growth problem worrying investors
In a conference call with analysts to discuss the company’s third-quarter earnings, Facebook CEO Mark Zuckerberg stated that the company would be pivoting its Facebook and Instagram services to better appeal to younger users aged 18 to 29. Specifically, according to Zuckerberg, the company intends to accomplish this by making its full-screen video Reels feature a central focus of the two apps over the next year.
“Now and then, a format emerges that allows for new types of content.” “We saw it with News Feed, and we saw it with Stories,” Zuckerberg explained.
The announcement came after reports on Monday based on the Haugen documents indicating that teen Facebook usage was slowing. A stock split – together with a revision of Facebook core features – could also be a way to attract a more mature audience into the platform and to attract more investors. The Facebook stock split will not affect the company’s leadership structure but does mean that it will be possible to invest at a lower cost. The company also said it would “continue to invest in long-term projects.” The stock split could be seen to make the company more accessible for people who aren’t tech-savvy.
According to The Verge, documents show that the number of teenage Facebook app users in the United States has decreased by 13% since 2019, with a projected drop of 45% over the next two years. According to Bloomberg, the documents also revealed that Facebook researchers discovered that the company did not expect people born after 2000 to join the social network until they were 24 or 25 years old, if at all.
As a result, Facebook addressed the issue quickly and directly.
TikTok, in particular, has emerged as “one of the most effective competitors that we have ever faced,” according to Zuckerberg. However, CFO Dave Wehner also admitted that Snapchat, which launched a similar feature called Spotlight last year, has been a tough competitor among teenagers.
Changes to make Reels a more prominent focus for Facebook and Instagram will take time. Zuckerberg stated that the company will make all of its apps strive to be the best services for young adults and that.
When asked for specific user numbers for the Reels feature, which is already available on Instagram and Facebook, Wehner did not provide any figures other than to say that the company is pleased with Reels’s progress on Instagram.
Facebook announced last month that it would pay specific creators “based on the performance of their reels” to encourage the use of Reels. That money will come from a program announced by Facebook earlier this year that will pay $1 billion to creators through 2022.
Facebook and Zuckerberg have vigorously refuted many of the claims made by Haugen’s documents, but in the case of slowing use among teenagers, the company was quick to act.
To summarize, the Facebook stock split would allow the stock to be more accessible to more people by lowering the price of each share. Also, it made the Facebook stock more attractive to institutional investors, which will lead to an increase in investment capital for the company.