At the end of August, I wrote an article speculating on whether Facebook (NASDAQ:FB) stock had bottomed. Appropriately titled, “Has Facebook Stock Bottomed,” I concluded that it hadn’t, due to the short-term hit to profitability as a result of its ongoing efforts to make its social media platform safe and secure for all legitimate users.
Since then, FB stock is down 20%, as pressure mounts for Facebook CEO and chairman Mark Zuckerberg to move more quickly to resolve the company’s crisis-management issues.
It’s gotten so bad that big institutional investors are calling for Zuckerberg to give up the chairman’s role and appoint an independent director to oversee the board.
“A company with Facebook’s massive reach and influence requires robust oversight and that can only be achieved through an independent chair who is empowered to provide critical checks on company leadership,” said Scott Stringer, the New York City comptroller, who oversees the city’s ownership of approximately $1 billion in Facebook stock.
Mark Zuckerberg doesn’t like the idea of splitting the two roles — and neither do I. It’s not the same situation as Elon Musk, who had to split the roles at Tesla (NASDAQ:TSLA) or face a thorough investigation from the SEC.
The problem with appointing an independent director as chairman is that most corporate boards are merely the CEO’s “yes men/women” and are more interested in keeping their cushy jobs than truly representing shareholders.
Zuckerberg is right.
Facebook doesn’t need to split the roles. It requires an independent body to decide what stays and goes on Facebook… but I’m veering off course.
$140 and Falling
As I write this, Facebook stock is trading below $140 and is pennies off its 52-week low of $137.77. At the beginning of 2018, when FB was trading around $180, I doubt shareholders were wondering if it would ever trade below $100 — a level it hasn’t seen since 2015. I imagine that was doubly true in July, when it hit an all-time high of $218.62.
But here we sit less than $40 from the centennial mark. Nervous. Anyone?
The smart investors will be buying all the way down to $100. Facebook certainly will be.
Here’s what I said in September about Facebook share repurchases:
“While I have no idea how Mark Zuckerberg feels about paying a dividend, I do know that FB has repurchased $5.1 billion of Facebook stock in the first six months of 2018, almost three times the amount that it bought back in all of 2017.” I noted. “Since Facebook stock has reached its lowest level since April, I’d bet the farm that FB will buy back more than $5.1 billion of Facebook stock in the second half of 2018.”
When I opined this, FB stock was $165.
Guess how much it repurchased in the third quarter ended Sept. 30? $4.3 billion, at an average price of $175.12 a share. The midpoint in the quarter — between its high of $218.62 and its low of $158.87 — was $188.75; Facebook paid 7.2% less than that.
If you’ve spent any time studying the effectiveness of stock buybacks, as I have, you’ll know that most companies do a terrible job buying back its stock. Anywhere below the midpoint is a sign of efficient share repurchases.
So, in September, I said that Facebook would buy back more than $5.1 billion of its stock in the second half of 2018. Well, with the fourth quarter yet to come, it’s only $800 million away.
With $3.54 billion left on its share repurchase authorization, the likelihood is high that the board will up that authorization amount. With Facebook stock trading below $140 and trailing 12-month free cash flow of $17.5 billion, I’d say it’s a virtual certainty that Facebook repurchases more than $800 million in Q4 2018.
So, Exactly How Low Can FB Stock Go?
I’m not a soothsayer. As a result, your guess is as good as mine.
What I do know is that, as every day passes and its stock price continues to fall, the smart money will be buying FB stock — and that goes double for the company itself.
I believe that capital allocation is the CEO’s single most essential job. Given how smart Facebook has been at buying back its stock, people like Scott Stringer might want to consider the downside of splitting the chairman and CEO roles.
Mark Zuckerberg’s a lot of things — a lousy capital allocator he’s not.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
