While other tech companies long ago moved investment away from free services and toward cloud applications, Facebook (NASDAQ:FB) remained stubbornly devoted to the “free” web.
Instagram, Whatsapp and Facebook are monetized strictly through advertising. In today’s market, that’s an unpopular stance.
Despite a top-line growth rate of nearly 40% and despite having $41 billion in the bank and no debt, Facebook still has a price-earnings ratio of 22. That’s in line with industry averages, and FB stock is valued at 16 times its 2018 operating cash flow of $29.2 billion.
Facebook is thus the cheapest of the “Cloud Czars,” the companies whose huge data centers and fiber optic lines now dominate global communications. It’s the cheapest because the risks in its business model, the cost of policing internet speech, keep rising.
But all this may be about to change.
A Local Ordinance
Ever since the Web was spun, 25 years ago, activists have warned that the First Amendment is only a local ordinance and even that has limits.
What can, or should, Facebook do about the propaganda of anti-vaccination groups that is leading to outbreaks of previously tamed diseases that could let those germs mutate and threaten millions? It will stop promoting them, stop treating them as an advertising target, but it won’t remove them or edit them. Needless to say, no one is happy.
Around the world, wherever there is controversy, Facebook is stuck in the middle. It recently acted against “inauthentic behavior,” groups inciting violence in Great Britain and Romania, taking down both Facebook and Instagram accounts.
A lot of this moderation work has been outsourced to Cognizant (NASDAQ:CTSH), which is based in New Jersey but mainly operates out of India. Staffers are making what The Verge calls “fast food wages” and being driven crazy by the conspiracy theories they’re forced to focus on.
What Facebook bears are realizing is that being the world’s speech police doesn’t scale.
Turn to WeChat
CEO Mark Zuckerberg’s latest missive to the world admits that “public social networks” like Facebook are losing out to “private, encrypted services.” He is refocusing Facebook on that.
In other words, Facebook wants to become WeChat, the Chinese service of Tencent Holdings (OTCMKTS:TCEHY).
American users (like me) see WeChat as a text service that supports links and Chinese characters, but it’s much more. Most important for Facebook is that it’s a payment service, used for everything from booking doctor appointments to filing police reports.
These are paid services, although they can also be supported by ads from merchants. China’s mobile payments business came to $32 trillion in 2017, according to China Daily.
Bottom Line on Facebook Stock
Facebook is launching its biggest pivot since early in the decade when it committed to building cloud data centers before it had the cash flow to support them.
It hopes that by switching from public to private communications, and from ad-based to transaction-based services, Facebook can create spectacular growth without the controversy, and costs, it faces now. If it works out as hoped, Facebook’s market cap could easily approach that of the other Cloud Czars. Tencent’s market cap stood at $416 billion on March 8.
If Facebook had headed down this path five years ago, I’d be screaming buy, buy, buy. But the reputation hit Facebook has taken over the last year, and the cost of scaling to launch a full WeChat competitor makes me hesitant.
Facebook is no longer just a growth stock, it’s become pure speculation as well.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM, MSFT, AAPL and AMZN.