Will a Move Into Gaming Be a Winner for Facebook Stock?

Facebook (NASDAQ: FB) is the social media juggernaut. It has no real competition, or at least nothing that comes close to its user base and appeal to advertisers, besides YouTube. Its dominance has made the company the toast of Wall Street for years.

With the COVID-19 pandemic, people are stuck at home browsing online and interacting through social media. Facebook should be poised to benefit incredibly, but will it? Will these trends be enough to offset declining ad spend by its clients?

The Dow Jones industrial average and S&P 500 have recouped some of their losses since the onset of the coronavirus pandemic, but Facebook has vastly outperformed these indices, with its stock price up roughly 50% from the March lows.

A big part of Facebook’s rise to power has been its user growth. With all its new users, Facebook’s advertising reach only grows. In its most recent quarterly report, family daily active people (DAP) increased 12% year over year to 2.36 billion, while family monthly active people (MAP) increased 11% to 2.99 billion. There are about 8 billion people on the planet, and Facebook has access to just over 38% of them.

Note that these “family” metrics represent estimates of the underlying number of unique people using one or more of Facebook, Instagram, Messenger, and/or WhatsApp.

Winning the Game

E-sports has become one of the hottest trends online. Whether people are streaming themselves playing online, watching others play, or even following the biggest tournaments in the world, online gaming has become wildly popular. Games such as Activision Blizzard’s (NASDAQ: ATVI) Call of Duty and Electronic Arts’ (NASDAQ: EA) FIFA have been beneficiaries of this trend.

Facebook already has a platform that reaches roughly 3 billion people on a monthly basis, so breaking into online gaming seems like a logical move. As a result, Mark Zuckerberg is playing a game of his own, with a new mobile gaming app. The company had planned to release the free app in June, but moved up the launch to April because of the coronavirus shutdown.

“Investing in gaming in general has become a priority for us because we see gaming as a form of entertainment that really connects people,” Fidji Simo, who is head of the Facebook App and reports to Zuckerberg, told the New York Times. “It’s entertainment that’s not just a form of passive consumption but entertainment that is interactive and brings people together.”

The social network noted that more than 700 million of its 2.36 billion DAP are already engaged in gaming content on its platform, and the shutdown has pushed the numbers even higher.

The new app includes casual games and access to gaming communities. Users can also upload streams of other mobile games on the same device via its Go Live feature.

The app was tested in Southeast Asia and Latin America over the past 18 months. Facebook is releasing it on the Google Play store for Android, and is currently waiting for approval from Apple to release on the iOS platform.

Amazon’s Twitch and Google’s YouTube are the biggest competitors for the app. TechCrunch’s Brian Heater speculates on how this could play out:

It remains to be seen how the Twitch/YouTube method will translate for a platform traditionally more focused on casual gaming titles like Words With Friends. Not all of the service’s attempts to spin off features as devoted apps have been successful, but the rushed timing could give the service an extra boost, as users seek out new forms of content and socializing during a global shutdown.

Reflecting how big and lucrative the gaming market may be, Microsoft (NASDAQ: MSFT) recently announced that it has more than 10 million subscribers to Xbox Game Pass. Described as “Netflix for video games,” it works for console- and PC-based players and gives users access to games from a range of publishers for a single monthly fee.

Facebook is an aggressive player and won’t want to be left behind by the competition.

It All Ads Up

In its first quarter report, Facebook ad revenues increased 17% year over year. At the same time, the company used its earnings announcement to hedge expectations for the second quarter.

It’s worth pointing out that the digital ads market has faced some difficulty over the past few weeks with the COVID-19 pandemic in clear view. In its release, Facebook noted that it had seen “a significant reduction in the demand for advertising, as well as a related decline in the pricing of our ads, over the last three weeks of the first quarter of 2020.”

In the absence of second-quarter guidance, Facebook said that the first three weeks of April experienced flat growth from the same period last year in the company’s outsized ads business.

Many thought that with companies cutting their advertising budgets as a result of the pandemic, Facebook would suffer. While there has been some difficulty, the company has remained strong. In fact, Facebook’s $17.44 billion in ad revenues makes up a significant portion of its revenue growth.