There’s little doubt that Facebook, Inc. (NASDAQ:FB) has plenty of fans on Wall Street. Evercore ISI recently suggested FB stock could advance as much as 30% in the coming year, while the options market is implying a FB stock price increase of 20% sometime in the foreseeable future. In the shadow of the 43% gain we’ve seen year-to-date, that’s saying something.
Is it all too much, though? That is to say: have the pros and amateurs alike become so enamored with the momentum that they’re not seeing the brewing risks from rivals like Snap Inc (NYSE:SNAP) and Twitter Inc (NYSE:TWTR)?
The simplest answer is, yes, it’s a distinct possibility. There’s a reason “expect it when you least expect it” has become an all-too-common cliche.
Was 2017 ‘Peak Facebook’?
For the record, Evercore ISI’s Anthony DiClemente noted to investors on Tuesday, “Today’s leading tech companies are leveraging the internet to disrupt and take profits from large established industries, a dynamic that is driving real earnings and free cash flow growth. Beyond that, smartphone ubiquity, the transition from offline to digital marketplaces, and continued growth in user adoption of emerging/established digital platforms are providing fuel for the next legs of growth.”
He’s not wrong. It’s also a relatively non-descript explanation, however, for the $225 price target he set for FB stock with Evercore’s new coverage of Facebook.
And, generally speaking, it’s a more philosophical/observational take that looks back, rather than a numbers-driven one that looks ahead. When we start seeing those kinds of outlooks, it’s often a sign that stock-pickers aren’t crystal clear about what the future may hold; sometimes it coincides with the chasing of past performance, hoping it will persist, but not finding decisive reasons why it should persist.
DiClemente did specifically note Facebook’s deeper dive into video and the further cultivation of Instagram as revenue growth drivers, to be fair.
The futures of both are murky as best, however, in light of what its rivals are doing. Indeed, just this week, Barclays upgraded Snapchat parent company Snap to an “Overweight,” suggesting “the worst is behind SNAP and company is likely to get back on track in 2018.” Analyst Ross Sandler made it clear that at the very least, the era of Facebook’s easy dominance over Snapchat was coming to a close.
Perhaps the biggest threat to FB stock as we head into 2018, however, isn’t what one competitor or another might do on their own, but what they might do together.
The Washington Post‘s Shira Ovide only brought it up as a possibility this week, but a partnership of some sort between Snapchat and Twitter for the purpose of chipping away at Facebook’s lead isn’t out of the question — even if it’s only an unspoken, undefined effort rather than a contracted agreement.
It certainly wouldn’t be out of character for the market’s tech stocks that find themselves in second- and third-place in their respective markets, unable to make any meaningful headway. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Wal-Mart Stores Inc (NYSE:WMT) are finally teaming up in an effort to prevent Amazon.com, Inc. (NASDAQ:AMZN) from continuing to grow unchallenged. Facebook and salesforce.com, inc. (NYSE:CRM) are partnering to improve the cloud-based business platform called Quip, which poses a threat to Microsoft Corporation (NASDAQ:MSFT).
Point being, alliances that seemed unlikely just a few years ago are the new norm, out of necessity. The one thing worse than feeding your rival, in this case, is letting the biggest player in the arena become even bigger.
With few other choices left, if Twitter and Snapchat don’t at least indirectly team up against Facebook, some other ad-hoc team will.
Looking Ahead for FB Stock
Don’t read too much into the possibility. Facebook is still the king of social media and just by leveraging its scale and size, it will remain at the top of the heap for a long, long time.
On the other hand, priced at a trailing price-earnings ratio of 34.1 and a forward-looking P/E ratio of 26.5, FB stock is priced as if the next couple of years are going to be as growth-packed as the past five have been. That’s not a likely outcome, though — not because Facebook isn’t a juggernaut, but because, given enough time, rivals will grow desperate enough to do some amazing things that they may not have been willing to do a couple of years ago.
It sounds crazy to be sure, but it sounded just as crazy to think book stores would go out of style, that Yahoo wouldn’t remain the king of search engines, and that a BlackBerry device would not be the preferred smartphone of the business world. You can never say never.
As was noted earlier, expect it when you least expect it… or at least acknowledge the possibility that the market’s lofty expectations for Facebook may be dangerously high.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
