Source: PaxForex Premium Analytics Portal, Fundamental Insight

Facebook's share price continues to climb. The company is currently trading near historic highs as a large portion of the world's population uses this social platform each month.

Nevertheless, rather than a potential user glut indicating a slowdown, a strong balance sheet and its continued expansion in a troublesome environment could conversely lead to more investors interested in the stock of this popular company.

In the last quarter, the family of monthly active people, suggesting users who have logged into at least one Facebook app in the past 30 days, rose to 3.3 billion. It represents about 42% of the world's population. This impact is indicative of Facebook's position as an incredibly strong advertising platform.

However, it points to a problem. With such a large portion of the world using its platforms, reasonably, those gains could reach a plateau point for the foreseeable future, ultimately limiting Facebook's growth potential. It may remind investors of slower-growing companies like Coca-Cola, which must find new growth even as it operates in nearly every country in the world.

Fortunately, Facebook has found a plausible solution to this issue. Just as Facebook has spawned new avenues of growth with Instagram and WhatsApp in recent years, it has created another avenue for social media growth through virtual reality (VR).

Facebook has created Horizon, a VR world where you can create environments, connect with friends or explore virtual worlds. Users access this world through both Oculus headsets and the Facebook network. It provides the company a competitive advantage because it can combine VR capabilities with a social network unmatched by other industry players.

Also, advertising, which remains its main source of revenue, continues to skyrocket. Indeed, during the pandemic, increased user engagement benefited Facebook only to a limited extent, as demand for advertising dropped. In the second half of the year, however, there was a shift from services to products, representing a tailwind to this business, especially with products sold online.

The company's financial performance reflected this growth. Despite headwinds in early 2020 amid the pandemic, the company's total revenue was nearly $86 billion. Most of the growth came from advertising revenue, up 22% from 2019. However, a 72% increase in "other revenue," mostly related to advertising revenue, points to success outside of advertising.

Besides, net income rose 58% over the same period to just over $29.1 billion. A 37% reduction in general and administrative expenses, which refers to payroll, share-based compensation, and professional services, explains much of the increase in net income. In 2019, Facebook spent $5 billion on the FTC settlement. If it hadn't, general and administrative expenses would have grown at about the same rate as revenues.

Despite this success, Facebook has to be cautious. The company expects revenue growth to remain stable or increase slightly through 2021. Nevertheless, it has expressed concerns about the introduction of privacy-related changes that will come with Apple's iOS 14. The company also mentioned that European regulations could be an obstacle if they affected data transfers across the Atlantic.

Still, few companies are in a stronger position than Facebook to deal with adverse weather conditions. Facebook maintains a strong cash position, generating more than $23 billion in free cash flow in 2020. The company currently holds nearly $62 billion in cash and marketable securities. The fact that the company has no debt frees up that cash to help Facebook deal with unexpected problems and make new investments.

Thanks in part to this stability, the Facebook stock is quietly hitting new highs. Amid this growth, the Facebook stock has risen about 80% in the past 12 months.

It leads to a P/E ratio of about 31, which is about 33% higher than last year when the stock began to recover from the massive sell-off in early 2020. Nevertheless, the valuation has remained in a range over the past four years. Assuming revenue growth remains close to 20% per year, Facebook should at least maintain this P/E ratio for a long time.

Despite worries about saturation, investors may find something to like about Facebook stock. Time will show what happens when Facebook can no longer depend on significant user growth. Nevertheless, ad spending remains strong, and Horizon has demonstrated early signs of success. Even if total revenue remains in the range, its growth indicates that Facebook can continue to generate income for investors for a long time.

While the price is above 289.00, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 302.82
• Take Profit 1: 328.00
• Take Profit 2: 338.00

Alternative scenario:

If the level 289.00 is broken-down, follow the recommendations below:

• Time frame: D1
• Recommendation: short position
• Entry point: 289.00
• Take Profit 1: 272.00
• Take Profit 2: 262.10