When it comes to Facebook (NASDAQ:FB), the negative media coverage simply won’t stop. Just do a quick Google News search of “Facebook” and see what you find today.
For example, as of this writing, one of the top headlines warns of Facebook facing a crackdown on market power in Australia. A few weeks ago, it was an NBC News piece on how Facebook might have a racial discrimination problem and a Yahoo Finance article detailing why Facebook’s fake account scandal isn’t over,
Yet, despite this continued negative press on Facebook, Facebook stock has actually had a strong few weeks. Since dropping to a multi-year low on November 20, FB has rebounded — albeit bumpily — and is up 11%. Meanwhile the Nasdaq is up just 0.85% in that time and the S&P 500 is down 0.33%.
Some may call this a dead cat bounce. And, it very well may be. But, it is nonetheless worth noting that despite continued negative press, Facebook stock has bucked its downtrend and managed to head steadily higher over the past weeks.
Does this signal the end of the selloff for Facebook? In all likelihood, no. But, it is a positive near-term development, while the long-term fundamentals supporting FB stock remain very robust.
As such, I maintain the following bull thesis. Facebook is still one of the most powerful internet companies in the world whose unprecedented digital reach and influence makes it an irreplaceable and extremely valuable component of the digital-advertising process. Near-term weakness in FB is ultimately a long-term buying opportunity. But, investors should exercise patience in buying the dip, since a rebound will likely take a few months — or a few quarters — to fully materialize.
Near-Term Press Remains Negative, But Facebook Stock Has Bounced Back
The near-term press surrounding Facebook remains negative. If anything, negative press coverage on Facebook is actually accelerating. But negative press coverage is nothing new. It’s been around ever since Facebook stock started free falling at the end of July.
But, what is new is that Facebook stock is ignoring this bad press. The trend over the past few months is that bad press has equaled bad stock. But, over the past three weeks, we’ve had more bad press, yet the stock has been strong. Since bottoming out on November 20, Facebook stock is outpacing both the Nasdaq and S&P 500.
This is a positive development. It’s a sign that sentiment is so bad on Facebook and FB so cheap, that we may have finally found a bottom, regardless of what further negative headlines come through the pipeline. It’s also a sign that the market is starting to separate press from fundamentals, and is discounting headline risks that don’t affect the fundamentals.
Does this mean the selloff in Facebook stock is over? Hard to tell. But, a strong stock against continued bad press is a positive near-term development.
Long Term Fundamentals Are Healthy
There are really only two things that affect Facebook stock in the big picture: users and advertisers. One of those follows the other (advertisers always follow users). So, at the end of the day, all that truly matters at Facebook is the company’s total reach.
From where I sit, that reach is still unprecedented and not dropping. In total, Facebook is still an ecosystem of 6 billion digital non-unique users (2.2 billion users on Facebook, 1 billion on Instagram, 1.5 billion on WhatsApp, and 1.3 billion on Messenger). Maybe the 2.2 billion number on Facebook starts dropping soon. That wouldn’t be surprising. But, even if it does, it will probably be because the 1 billion number on Instagram is rising. Why? At the end of the day, social media is ingrained into the fabric of our lives (nearly 70% of U.S. adults use social media, up from 5% in 2005). If we aren’t using one social media platform, it isn’t because we quit social media. It’s because we are using a different social media platform.
Meanwhile, digital communication is also a utility, so the 1.5 billion users on WhatsApp and 1.3 billion users on Messenger seem secure.
Thus, this is a company that has an opportunity to monetize a user base that measures 6 billion non-unique users and is mostly stable. Right now, Facebook is only monetizing about 3.2 billion of those users (2.2 billion from Facebook, and 1 billion from Instagram). The other 2.8 billion on Messenger and WhatsApp are hardly being monetized. From this perspective, Facebook is presently at just half of its advertising revenue potential.
Yet, Facebook stock trades at less than 20x forward earnings. Thus, you have a stock with still huge growth prospects trading at a pretty low multiple. That combination implies big gains in the long run.
Bottom Line on FB Stock
Over the past few weeks, Facebook stock has bucked the trend of negative press weighing on the stock price. That is a positive near-term development. Meanwhile, the long-term fundamentals support significant upside from current levels. As such, the bull thesis on Facebook stock is starting to look more compelling.
As of this writing, Luke Lango was long FB.