The Case for (Eventually) Buying Facebook Inc Stock

Facebook stock - The Case for (Eventually) Buying Facebook Inc Stock

Source: Facebook

Facebook Inc (NASDAQ:FB) faces its biggest scandal to date as details of the Cambridge Analytica scandal come to light. The negative publicity has inspired investors to dump Facebook stock en masse. As a result, the Facebook stock price has now seen its largest percentage drop since soon after its IPO in 2012.

However, many of the factors that made FB stock a Wall Street darling remain in place, and those who shift their focus to finding the right time to buy could enjoy outsized gains once the scandal fades in the headlines.

To be sure, 2018 will go down in FB history as a terrible year. The year started off with the company overhauling its news feed to the displeasure of its investors. Many felt the overhaul would lead to people spending less time on the platform. Now, the worry has become whether people will log on to the platform at all after the Cambridge Analytica scandal.

As the Federal Trade Commission and 37 state attorneys general question the company’s behavior, Facebook finds investors and users leaving in droves.

Privacy Concerns and Facebook

In the end, I believe this will become an opportunity to friend Facebook stock at a lower price. Here’s why. First, people know something like this has been happening already.

For anyone who reads or thinks about the topic of online spying, they know that FB along with big tech peers such as Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), and Amazon.com, Inc. (NASDAQ:AMZN), and others know where we are at all times through our smartphones.

It should serve as a red flag when the app from Yelp Inc (NYSE:YELP) makes unsolicited suggestions about where to eat when one drives to certain areas of town at midday. Is this disturbing? Perhaps. However, people continue using their smartphones despite this spying.

Second, most are not deleting FB completely even if they unfriended Facebook. In a recent article, many who describe Cambridge Analytica as the “last straw” turned to other platforms. Some turn to sites owned by Twitter Inc (NYSE:TWTR) or Snap Inc (NYSE:SNAP).

However, others intend to spend more time on Instagram, Messenger, and WhatsApp, platforms owned by FB. Moreover, many will likely come back to Facebook itself. Those who unfriend Facebook miss friend and family milestones, or social invitations coordinated through the flagship site. Both of those factors serve as compelling incentives to keep one’s page.

Facebook’s Strong Balance Sheet

Third, as I mentioned in a recent article, Facebook supports one of the strongest balance sheets in corporate America. The company holds nearly $42 billion in cash as of its last earnings report. The company can spend some of its vast resources to rebuild the reputation of its flagship platform.

It can also buy more platforms in the same way it purchased Instagram and WhatsApp. FB can also create new platforms or enter into related businesses.

The company can also use some of this cash to rebuild Facebook stock itself. Namely, it could follow in the footsteps of Apple and Microsoft Corporation (NASDAQ:MSFT) and introduce a dividend.

The dividend would open Facebook to a new class of conservative and income-oriented investors. It would likely help to break the relentless downtrend that currently traps Facebook stock.

Still, with or without a dividend, this scandal has formed a buying opportunity in FB stock once the selling stops. Even before Facebook faced reputational issues, the stock never became expensive. Today, the stock trades at a price-to-earnings (PE) ratio of under 30. So far, analysts estimate a forward PE under 23.

That estimated forward PE could rise amid the scandal. However, the PE remains well below average in the internet sector, and near the average of the S&P 500 itself. I don’t recommend investors try to fight the downward trend. Still, once the scandal leaves the headlines, Facebook stock will likely start trending higher again.

The bottom line on Facebook stock

Facebook has taken a hit amid the Cambridge Analytica scandal, but that decline has begun to form a buying opportunity that could lead to outsized gains later. Nobody questions that this breach of trust has hurt the reputation of the social media giant. Regaining its standing will prove costly and time-consuming. However, FB stock investors should look at this as an opportunity.

Despite the tremendous data sharing that comes with owning a smartphone, few have stopped using the devices. Moreover, many people who are leaving Facebook have turned to FB-owned apps.

Also, its tremendous cash pile gives the company many options in rebuilding its reputation and bolstering FB stock. I do not recommend fighting trends. However, once the downward trend ends, investors will be left with an opportunity to buy Facebook stock at a low valuation.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/facebook-stock-eventually-buying/.

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