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Facebook Inc (FB) Is About to Eat Alphabet Inc’s (GOOGL) Lunch

I’ve argued in the past that Facebook Inc (NASDAQ:FB) is too cheap, but I can understand why some investors might be cautious, if not bearish, toward Facebook stock.

Facebook Inc (FB) Is About to Eat Alphabet Inc's (GOOGL) Lunch

Source: Shutterstock

FB stock has risen about 700% from all-time lows reached in 2012. And the company now is worth almost as much as Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) and more than Exxon Mobil Corporation (NYSE:XOM), among many others.

But Facebook itself already has warned that its blistering growth rate should slow in the coming years.

At less-than-20-times 2018 consensus per-share earnings plus cash, Facebook stock still looks cheap. Meanwhile, the scandal this week at Alphabet Inc’s (NASDAQ:GOOGL, NASDAQ:GOOG) YouTube is another example of what a mess the online advertising industry is. The more the rest of the business struggles, the more obvious the value of the Facebook platform becomes. And that should lead to further upside for FB stock.

YouTube, Twitter and Facebook Stock

Google has a problem on its hands with YouTube. Major advertisers — such as the U.K. operations of McDonald’s Corporation (NYSE:MCD), Starbucks Corporation (NASDAQ:SBUX) and Johnson & Johnson (NYSE:JNJ) — have pulled all non-search advertising.

The boycott is estimated to cost Alphabet $750 million to $1 billion in revenue. It seems highly likely that some — if not most — of that spend will make its way to Facebook. Those brands still want to advertise online — and Facebook will be the best option left standing.

After all, Twitter Inc (NYSE:TWTR) has its own well-documented problems with “hate speech,” one reason why ad growth on that platform has stalled out. Facebook content can be controversial from time to time, but FB’s controls look stronger.

To be sure, Facebook has had some advertiser issues of its own. Late last year, the company disclosed a series of measurement errors, including an overstatement of the so-called “reach” of advertising campaigns. But Facebook at least has been on top of its problems — and is fixing them. Twitter and YouTube are playing from behind at the moment.

The Online Advertising Ecosystem Is Broken

The problems at YouTube are just a single example of an online advertising ecosystem that looks increasingly troubled. Twitter by its own admission has had trouble keeping major advertisers and providing consistent ROI. And the Leslie Jones debacle last year, along with consistent efforts to remove bots and battle hate speech, has hurt that platform’s reputation.

For its part, Google has repeatedly had to change its terms to combat fraud, adware and malware. And beyond the major platforms, there’s further worry for advertisers. Criteo SA (ADR) (NASDAQ:CRTO) and privately held SteelHouse had a nasty lawsuit last year, with each company accusing the other of click fraud and other malfeasance. One estimate suggests that fraud takes about one-third of online ad spending.

For major advertisers, in particular, online advertising is becoming a minefield. The content next to which ads are placed can’t be trusted. Measurement of campaign ROI is susceptible to error and fraud. Advertisers clearly are paying for bogus traffic — even on mobile.

In that context, Facebook – if it can convince advertisers it’s conquered its measurement errors — presents a compelling alternative to traditional online advertising spend. And if more issues like the YouTube ad boycott arise — and they will — ad demand should only increase, and that should push Facebook stock higher.

Bottom Line on Facebook Stock

There are two core risks to Facebook stock. The first is that traffic to the platform will decline, particularly if consumers find new social media outlets. So far, neither Twitter nor Snap Inc (NYSE:SNAP) has proven able to peel away much traffic.

The second risk is whether advertisers will keep their dollars on the site or take them elsewhere. That risk has been highlighted of late by Facebook’s own guidance and by last year’s measurement errors.

But that risk is diminished by the struggles at Facebook’s peers, which make FB advertising look more attractive — and more secure — by comparison. And with both risks rather low on a near-term basis, it’s hard not to see more upside for FB stock. There’s no debt, still-impressive earnings growth, and a multiple not far from that of the broad market as a whole.

Indeed, Facebook stock is attractive enough on its own. And if its competitors are going to send more business its way, it’s more attractive still.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/04/facebook-inc-stock-is-about-to-eat-googles-lunch/.

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