Since its founding, Facebook Inc (NASDAQ:FB) has been a frequent source of drama. However, given the company’s massive scale, such issues are getting the attention of lawmakers. No doubt, this is causing some volatility with the FB stock price.
Here are just some of the recent controversies:
- The Russian Connection: This is perhaps the biggest worry for the FB stock price. The company has recently disclosed that Russian-based entities were behind some of the divisive messages spun during the heated presidential election. So far, FB has indicated that about 10 million saw such ads. But then again, it could be much more significant. Keep in mind that it was not long ago that FB claimed that there was no interference! Now to be fair to FB, the company is certainly not the only social network that has problems. Twitter Inc (NYSE:TWTR) is also under pressure. Its platform may be even more susceptible to problems because it is generally easier to use bots and other automated systems to pump out nefarious tweets and content.
- Hate Speech: Given that a large portion of FB’s advertising is automated, it’s inevitable that certain offensive content will not be detected. Some examples include campaigns that involved anti-Semitic content as well as fake news regarding the horrific massacre in Las Vegas this week.
All this poses serious brand issues, which could weigh on FB stock. One of the biggest risks is that marquee advertisers may start pulling back.
So in light of this, FB has been taking actions. One effort is to add 1,000 people to review ads. Even though its artificial intelligence (AI) is getting much better, it is far from perfect. Having a human element is definitely critical and should act as a useful backstop.
But this may still not be enough. It’s definitely tough to manage a base of 2 billion user.
Facebook Stock Price and Regulation
So, yes, there may ultimately be some type of regulation. And while this may seem harmful to the prospects of the FB share price, I actually think the fears may be exaggerated.
Why? Well, first of all, FB will not be singled out. New regulations will also apply to other social networks like Snap Inc (NYSE:SNAP) and TWTR. Yet these companies have fewer resources compared to FB. This means that the smaller social networks may feel more pressures.Next, any new regulations are likely not to be far-reaching. In fact, there is little appetite in Congress to enact legislation regarding online content. Besides, special interest groups probably do not want to hamstring their ability to leverage social networks for their objectives. Add to that the Trump Administration’s aggressive stance against regulations.
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Some Wall Street analysts are not overly worried about the consequences of government regulation. Here’s what FBN Securities Shebly Seyrafi has had to say about the matter: “We are not opposed to limited government regulation of political ads, and based on what is proposed the regulation would be more of a limited kind anyway. So whether regulation eventually happens or there is just self-regulation, this issue appears to be way overblown.”
He has a $210 price target on Facebook stock. It opens this morning just shy of $170.
Bottom Line On The FB Stock Price
When looking at FB stock, it is really tough to be bearish. The occasional negative story is often a good buy point.
Let’s face it, Facebook still has multiple drivers that should propel growth for some time, such as WhatsApp, Instagram, Messenger and Workplace (essentially a social network for businesses). The company is a must-have for advertisers because of the global scale and targeting capabilities. FB is also moving into other valuable categories like online video.
And finally, the FB stock price is still fetching a reasonable valuation, with a forward price-to-earnings ratio of 26X. This is actually in line with Alphabet Inc (NASDAQ:GOOGL), which is not growing at the same pace (during the latest quarter, FB posted a sizzling 45% sales increase). Even if there are regulations imposed, it does not seem probable that they will have much of an impact anyway.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
