Institutional investors are giving Facebook Inc (FB) stock a whole new level of love. In the fourth quarter, for the first time ever, shares of the dominant social media company were one of the 20 widest-held names by institutional investors, according to eVestment data.
Why on earth did it take so long? FB is the eighth-most valuable company in the world, with a valuation around $300 billion. It’s the largest connected network of people in the world, with more than 1.6 billion monthly users.
You’d think the Wall Street bigwigs would’ve wised up to Facebook and bought its stock by the masses already. In reality, I realize why FB shares are only now getting widely accepted by major money managers. (It won’t be overlooked again.)
FB Stock: Finally More Than a Fad
The mainstream money managers of the world have finally collectively realized that Facebook — and by extension FB stock — is no joke. To become one of the most widely-held stocks by institutional investors, you’ve gotta be a mega-cap, blue-chip stock.
Of the top five stocks held by institutional investors, Alphabet (GOOG, GOOGL), Apple (AAPL), Microsoft (MSFT), JPMorgan Chase (JPM) and Johnson & Johnson (JNJ), four of them are top 10 in the world by valuation (JPM is top 16). With the exception of Alphabet, all of them are Dow Jones components.
So a big reason FB stock is so widely-held is simply that it became too large to ignore. A lot of institutional investors are closet index-huggers: They may have a few large, unique positions, but if they have too many original thoughts, they could be wrong, and then they’d look bad. To hedge the risk of deviating too much from the benchmark they compare their returns to, they mimic the holdings of the benchmark itself.
With Facebook stock up 32% in the last year, it’s a much bigger part (percentage-wise) of the S&P 500 (-4% over the past year) and Nasdaq (-5%) than it was a year ago.
Speaking less cynically, it’s also possible that portfolio managers are starting to feel that Facebook, and the social media industry as a whole, is now generally one of their “core competencies.”
Recall that Warren Buffett, the greatest investor of all time, earned his returns while more or less shunning the tech sector entirely. He felt he didn’t understand it well enough, and that it changed so quickly there was no way to predict which companies would last for decades and which wouldn’t.
Similarly, the dynamics of the social media landscape are still murky, if clearing up a bit. Facebook’s billions of engaged users, dominance in targeted advertising and unrivaled prowess in mobile make FB stock a no-brainer in its industry, but it hasn’t been an obvious buy forever.
A few years ago, reports that teens and young users were abandoning the network or spending much less time on the platform made some wonder if Facebook was just another MySpace — here today, gone tomorrow.
That’s clearly not the case, with FB growing users at a quicker pace than Twitter (TWTR) despite the fact that Facebook already has five times more users than Twitter.
The bottom line? Institutional investors are, across the board, finally getting wise to FB stock. They realize it’s here to stay for the long term, and to ignore it would be to miss out on a major opportunity.
The same is true, by the way, for individual investors. Well-diversified portfolios should include a position in Facebook. And 15 or 20 years from now, I wouldn’t be surprised to see Facebook paying a dividend in the Dow.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at email@example.com.