Think about this for a second: Facebook Inc (NASDAQ:FB), a company founded in 2004 by a CEO who is too young to run for president, is what you call a “blue-chip stock.”
That designation usually brings to mind companies like Berkshire Hathaway Inc. (NYSE:BRK.A). But despite its limited life, it’s a fitting description for Facebook stock. FB has a market cap of about $370 billion and year-over-year growth rates of 50%-plus.
This year, FB should easily surpass $24 billion in sales, and last quarter it put nearly one-third of its sales on the net income line. It is putting $3.8 billion of capital to work this year on building out its data centers.
Perhaps the best thing about Facebook is it’s still hungry. Its 2015 revenue still put it at No. 157 on this year’s Fortune 500. There are mountains left to climb, and Facebook is both young and hungry.
It’s Time to Worry About Facebook Stock
When everyone is in love with a stock, I tend to get out the worry beads. There’s an old saying on Wall Street that when everyone is buying, the next move has to be down.
So what could go wrong with Facebook stock? Quite a lot.
Start with taxes. Facebook settled a tax case with the United Kingdom in March, but could face a hit of $5 billion to the U.S. Both cases involve the transfer of sales to Ireland, whose tax rate is lower.
Facebook stock is in the crosshairs of European bureaucrats, too. It is facing the European Court of Justice over its privacy policy, German authorities are worried about its use of WhatsApp user data and EU regulators want it to pay for content it merely links to through changes in copyright laws.
As governments continue to push back against online services and the freedom they offer users around the world, Facebook has to be in their sights. FB will be damned for resisting censorship calls, but also damned for responding.
And “next big thing” virtual reality may not be a thing yet. After spending $2 billion on Oculus Rift, a virtual reality headset, three years ago, and millions more on development, sales may be flatlining.
Reasons to Believe in FB Stock
Optimists point to Facebook’s mobile dominance, and it’s just getting started with its monetization efforts. If that’s enough to convince you to buy Facebook stock at 61 times earnings, that is.
What’s more, the social media company is rapidly shedding its “social network” label and diversifying. Facebook Marketplace, an alternative to eBay Inc (NASDAQ:EBAY) and Craigslist, has just launched, using a tab in the U.S. and some other English-speaking markets previously reserved for Messenger. And Facebook seems obsessed with copying the functions of every other internet application, like Snapchat, monopolizing all of a user’s time and money. That should give it an enormous runway of potential growth.
It has also launched Facebook At Work as an alternative to LinkedIn Corp (NASDAQ:LNKD), which was just bought by Microsoft Corporation (NASDAQ:MSFT) for $26.2 billion, while Facebook Live wants to dominate TV, as Facebook Messenger wants to dominate messaging.
There is so much potential here, the bulls say, that even a few missteps can be easily forgiven.
Hold Your Horses
The law of large numbers says growth rates must slacken. The pushback from governments on both the content and revenue fronts has barely begun.
I liken Facebook stock to Google, now known as Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), which a decade ago was just having its “don’t be evil” mantra ridiculed. Ridicule can quickly turn to distrust, and distrust to hate. Despite its best intentions, Alphabet stock has hit a growth wall, and the shares today are only worth 3% more than where they started the year.
At some point, Facebook stock will hit the same wall. Before it reaches that stopping point, however, some shrewd analysts are bound to see the wall ahead and pull back.
Facebook will not be a blue-chip stock forever, and investors need to understand that.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in GOOGL and MSFT.
