Do Scandals Even Affect Facebook Stock?

FB's missteps have led to a lot of hand-wringing, but little apparent impact on the fundamentals that should drive Facebook stock

From a distance, the bad news appears to be piling up for Facebook (NASDAQ:FB) stock. Facebook seems to be consistently facing negative media coverage about its treatment of its customers’ sensitive data. Occasionally, it’s even been accused of mistreating the customers themselves.

The Fundamentals of Facebook (FB) Stock Remain Strong
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Most recently, FB has faced reports that it stored passwords in unencrypted documents. Facebook’s executives are departing amid tales of personal rivalries. The Right is angry that the platform allegedly is censoring conservative voices. Politicians on the Left are looking to break up Big Tech. The spectre of the Cambridge Analytica scandal still haunts Facebook and Facebook stock. And the response to the scandal by key executives like CEO Mark Zuckerberg and COO Sheryl Sandberg has left quite a bit to be desired.

The change in perception of the company has led to a change in the Facebook stock price. FB stock suffered the biggest one-day loss in market value in history last July, after the company said during its second-quarter earnings conference call that its spending would rise going forward. Even with its nice bounce after its Q4 earnings in January, Facebook stock not only sits below its past highs, but below where it traded after that July plunge.

Yet spending aside, there’s not a lot of evidence that the bad news has hurt Facebook’s business all that much. If Facebook is more bulletproof than investors realize, FB stock should  rise meaningfully from its current levels.

Q4 Earnings and the Facebook Stock Price

I wrote ahead of the Q4 report that Facebook’s earnings needed to change the story surrounding Facebook stock. I’d been bearish on FB after the July plunge, and given the company’s PR debacles, the report seemed potentially dangerous.

Even ignoring the headline beat, the earnings report was positive for Facebook stock for one key reason. Analysts and journalists might see the company’s 2018 as something close to a nightmare. But the people who matter – Facebook’s users – didn’t seem to care. The number of the website’s daily active users (DAUs) rose 9% year-over-year in Q4 to a stunning 1.52 billion.

Growth in the US & Canada – where the press coverage of the company seems most negative – has slowed. But even in that region,  DAUs still climbed 1% – and at a certain point, there simply aren’t more users that Facebook can add in those markets. For all the discussion about privacy and branding, users simply aren’t leaving the platform.

And outside the U.S., Facebook is actually continuing to add users. Its DAUs rose over 15% in Asia, 2% in Europe, and more than 8% in the rest of the world. The huge risk facing Facebook stock – an exodus of users that in turn would impair the experience of the remaining users – simply hasn’t materialized. Yet there still seems to be a lid on the Facebook stock price.

Does Anyone Else Care?

It’s not just users who seem relatively unaffected by the bad PR. Advertisers aren’t going anywhere. Remember that Alphabet’s (NASDAQ:GOOG,GOOGL) unit, YouTube, has on occasion lost advertisers based on their concerns about its content. In 2017, AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) stopped advertising on the platform. Consumer products giants Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL,UN) did the same last year.

Facebook doesn’t appear to have had any such issues. In fact, advertisers are spending more on FB. Its ARPU (average revenue per user) continues to soar, climbing 19% company-wide in Q4 and a whopping 30% in the U.S. and Canada.

If users aren’t concerned, and advertisers aren’t leaving, what’s the real risk facing Facebook stock? Higher security spending is hitting FB’s earnings, but management reiterated on the Q4 conference call that its expenses would normalize in 2020. Regulators may have a say, but even a potential billion-dollar fine from the FTC would amount to less than 1% of the company’s market cap. The idea that Congress – no matter who is President – could agree on a measure to break up Facebook seems close to ludicrous.

There’s an argument that other than the spike in the company’s spending, the fundamental case for Facebook hasn’t changed at all in the past few quarters. That’s probably a bit too optimistic; at some point, users may start departing if the bad-news flow doesn’t slow  But the company’s business still is operating largely as it was. There’s still room for FB to improve its monetization of Instagram and WhatsApp. And Facebook stock is cheap.

Is FB Stock a Buy?

The risks facing Facebook still need to be monitored. User growth, in particular, looks like the critical metric for Facebook stock. But coming out of Q4 earnings, even with the continued negative commentary about FB, the new bull case for FB stock is reasonably clear. Facebook stock trades at  about 17 times analysts’ consensus 2019 EPS estimates, excluding FB’s cash.

If FB’s spending does come down in 2020, and its user base continues to grow, Facebook will get back to double-digit-percentage earnings growth easily. That, in turn, sets up an easy path for the Facebook stock price to again clear $200, an increase of 20%+ from its current levels.

Investors have to trust that the path described above, which also requires that users stay active on the platform., remains open Given that Facebook’s users have remained active on the platform despite all the negative coverage, the more interesting question might be what it would take for those users to actually leave.

As of this writing, Vince Martin has no positions in any securities mentioned.

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/03/do-scandals-even-matter-facebook-stock/.

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