Facebook (NASDAQ: FB) faces billions in fines ahead and yet the stock is in a sustained uptrend. Though Facebook stock nearly traded above $200 a share in early May, the bulls backed down in recent weeks. What will it take for the stock to trade at $200 or more? Valuations are not excessive at 27 times earnings. The forward P/E is even more compelling at 19.4 times.
The lift in Facebook’s competitors might explain why FB stock is trending higher despite the billions it will soon pay the government. Snap Inc. (NYSE: SNAP) is up 110% in 2019 so far. The company reversed its disastrous app refresh, which resulted in a return to higher usage.
It is adding content to keep user time spent on the app. For example, Snap updated Trending Topics. Twitter, Inc. (NYSE: TWTR) topped over $40 a share before settling recently at $37.41. The company is experimenting with increasing ad impressions relative to the content shared.
Facebook’s $3 Billion Fine
In March, Facebook booked a $3 billion charge related to its settlement with the FTC. In relative terms, the charge is almost a rounding error when compared to the $15 billion in quarterly profits.
Losing user trust is Facebook’s real risk and yet markets are too complacent over this settlement. Facebook violated COPPA, a rule governing how children see advertising online. This could increase the fine, especially with the FTC delayed due to a bipartisan split.
Realistically, if Facebook’s fine increases, the stock may fall but will eventually recover. The company’s advertising revenue growth is so strong that it may absorb any one-time costs.
User-Privacy a Low Concern for Users
Users are mostly complacent with their privacy. If they had any concern at all, they would leave the site en masse. Instead, usage hardly changed. Plus, Facebook owns WhatsApp, and Instagram and usage are growing for both apps.
In Q1/2019, Facebook said around 2.7 billion people used Facebook, WhatsApp, and Instagram. Stories on all three sites topped 500 million daily active users. And Facebook is learning from its experiences from the Cambridge Analytica privacy breach.
WhatsApp will have more security and privacy than ever. This includes end-to-end encryption, with users getting more ways to interact on top of that.
Facebook Stock and Growth
Electronic payments and commerce continue to offer revenue growth opportunities for Facebook. CEO Mark Zuckerberg said the company is focused on adding such functions on Instagram and Facebook. Already, the sites have shopping and Marketplace. There, tens of millions of small businesses use these pages to share their inventory and help people discover goods and easily pay.
The growth in online transactions and payment processing from Square, Inc. (NYSE: SQ) and PayPal (NASDAQ: PYPL) in the last few years validate Facebook’s ambitions to develop a similar offering.
Facebook Messenger and WhatsApp have the highest potential for supporting private transactions. Users already have private messaging, so this is a natural space for supporting business interactions.
Facebook will test Payments in India first and if successful, roll out the service country by country. For now, investors do not have a timeline on the launch.
Profits from Instagram
Strong impression growth from Instagram Stories and Feed will draw users but is still not drawing as much revenue growth compared to Facebook. Despite Stories as the biggest individual driver of impression growth in the last quarter, Instagram needs higher engagement.
Until then, management does not expect limited advertising growth, which in turn limits the near-term profit potential.
The Bottom Line on Facebook Stock
Analysts are extremely bullish on Facebook stock, having an average price target of $220 for Facebook stock. Realistically, investors should not expect that 21% upside potential happening in the near-term.
Chances are low that users will leave the site due to privacy concerns but it is still a small risk factor. The FTC fine may change and the government may impose harsher restrictions, which could limit Facebook’s growth.
These are all low risks that will slow the stock’s ascent back to $200. In the longer-term, chances are good that the stock will trade well above the $200 level.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
