The tech rally has run out of steam. Shares of Alphabet Inc (NASDAQ:GOOGL) have gone nowhere since July. Even mighty Amazon.com, Inc. (NASDAQ:AMZN) has backed off. But Facebook Inc (NASDAQ:FB) marches on. FB stock is up nearly 12% since July started, and at $490 billion, it’s worth about $25 billion more than Amazon.
Facebook has powered through on the strength of an incredible earnings report for the June quarter. That report included net income of $3.894 billion ($1.32 per share) on revenue of $9.321 billion. Nearly 42 cents of every dollar coming in the door hit the net income line. Each employee earned nearly $189,000 of profit, four times the level of Alphabet.
Oh, and FB stock holders also cheered the news that the company will cut expenses, so that number may go up.
Forget trying to stop Facebook. Can anyone hope to contain it?
Pounding the Table
Analysts urging investors buy a stock are said to be “pounding the table” for it. Right now, they’re pounding the table for Facebook like it’s 1999.
Here’s an analyst who says the stock is worth $200 per share. Here is another one whose price target is $230. Jim Cramer recently told his TV audience that CEO and co-founder Mark Zuckerberg “has the next five years figured out” and that the stock is cheap.
Cheap? A gain of 33%, to $230 per share of FB stock, would bring Facebook’s value past that of Alphabet. Even now, you’re paying nearly $500 billion for a company with trailing-year revenue of $27 billion and calling it cheap?
Well, yes.
Facebook continued to grow revenue at 50% from year, and has already equaled its 2015 revenue with two quarters of 2017 left to go. Margins are rising, not falling. It continues to build cloud data centers but has no debt, zero. Operating cash flow is already tickling 2016’s $16 billion, again after just two quarters are gone.
The Bear Is Political Power
It is at this point that a prudent investor looks for bearish portents wherever they can be found. If they exist for Facebook, they are to be found in politics.
Facebook’s success in nurturing personal communication has made it a potent political force. It is the home of Trump TV and yet also home to Zuckerberg’s effort to filter “fake news.”
Facebook’s power is a global phenomenon that goes beyond content. Research has shown that Facebook ads, purchased based on psychological profiles, can sway elections with no one even knowing about it.
Small wonder, then, that speculation has begun building about Zuckerberg’s own political ambitions. He can make others president. Why not Zuck?
That may sound like a compliment, but it’s a curse. Politics isn’t business. It’s played by different rules. Those rules can easily come back and bite the business. Despite Zuckerberg’s strenuous efforts, China is reinforcing its “great firewall” against it and China’s government is immunizing itself against online dissent, even deleting chatbots that question the party line.
What China has learned, other countries can learn. What China has done, other countries can do. China’s campaign to stop Facebook’s political manipulations could become a big export product.
Bottom Line on FB Stock
For every political action, there is an equal and opposite political reaction. Abraham Lincoln said that if you want to test a man’s character, give him power. The same is true for companies.
Facebook is now the world’s dominant media company, its dominant advertising medium, and its dominant political actor. The reaction against that has only just begun, and I wonder whether FB stock bulls have considered that.
I wonder if you have considered that. I have, and as a Facebook shareholder, I’m concerned.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long AMZN and FB.
