Cryptocurrency Is Interesting But It Won’t Move Facebook Stock

GlobalCoin is intriguing but not yet material to the FB stock thesis

Facebook (NASDAQ:FB) is reportedly getting into cryptocurrency. The news hasn’t done much for FB stock, which has other issues to deal with. Facebook stock fell more than 7% on June 3 amid news of an Federal Trade Commission investigation.

Cryptocurrency Is Interesting But It Won't Move Facebook Stock
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That probe, which mirrors a similar Department of Justice investigation into Alphabet (NASDAQ:GOOGL), is the big story for now … and it probably should be. But Facebook’s intentions for cryptocurrency are intriguing. The question is whether they really matter to the FB stock price.

After all, a number of companies have tried to create value in and around cryptocurrency and blockchain. Riot Blockchain (NASDAQ:RIOT) and Eastman Kodak (NYSE:KODK) notably pivoted to the space. Even IBM (NYSE:IBM) has repeatedly touted its efforts in blockchain. None of the efforts have done anything, so far, to drive profits and all three stocks have headed in the wrong direction.

Still, Facebook might be different. Its existing base of over 2 billion users can amplify its efforts. The company — regulatory and reputational worries aside — will instantly add credibility to the technology. And Facebook is big enough to put money behind the effort and create confidence among users.

For now, however, that latter fact is the problem. Facebook is large. In fact, it’s huge. FB stock has a market value of $478 billion. At the moment, it’s hard to see cryptocurrency moving the needle on that figure even if Facebook’s efforts will be fun to watch.

Facebook and Crypto

News has been dribbling out about Facebook’s intentions for several weeks. Last month, the Financial Times reported that the company had held discussions with several of the big players in cryptocurrency. That even included the Winklevoss twins, who famously sued Facebook founder Mark Zuckerberg over the creation of the platform, and who have made several unsuccessful efforts to launch a bitcoin exchange-traded fund.

Two days later, the BBC reported that Facebook planned to launch its cryptocurrency, referred to as GlobalCoin, in the first part of 2020. The FT returned this past weekend with a story that the company had held initial talks with the Commodity and Futures Trading Commission about whether its coin would be regulated by that agency. (The CFTC generally regulates futures, which drive much of current trading in bitcoin. Whether a cash-based Facebook cryptocurrency would fall under its auspices remains somewhat unclear.)

All told, it does appear that Facebook, at least at the moment, plans to move ahead with GlobalCoin. Reports have suggested it would be a so-called stablecoin with its value pegged to the price of the U.S. dollar. Tether appears to be the most widely used stablecoin at the moment, but that cryptocurrency is embroiled in allegations that funds supposedly backing Tether were used to cover losses elsewhere.

Facebook’s balance sheet -= the company closed Q1 with $45 billion in cash and investments — would negate any such worries. Its heft and reach would instantly add credibility. It’s not hard to see users and businesses flocking to such an effort.

Does Crypto Matter for FB Stock?

The question is whether even a success is material to FB stock. Again, this is a company valued at almost half a trillion dollars. Tether has a “market cap” (as cryptocurrency traders define it) of just $3 billion.

Certainly, Facebook could drive issuances of well over $3 billion. But what, exactly, does that mean for the social network’s profits? It’s not clear at the moment but the answer very well could be nothing. The point of Facebook’s GlobalCoin might not necessarily be to make money by, say, taking a cut of transactions ala’ Visa (NYSE:V) or Mastercard (NYSE:MA). It might instead simply be a way to increase engagement or keep engagement from eroding, which would pressure advertising sales.

Even if Facebook were to become a payment processor via its coin, it’s not clear how successful it would be – or how much money it might make. The online payments space already is highly competitive, with Visa, Mastercard, PayPal Holdings (NASDAQ:PYPL), and many others. Online shopping — and online money transfer — is not a particularly difficult experience at this point.

Facebook could leverage its user base into driving adoption of its coin — but even several billion dollars in annual transactions, at a 1% or even 2% fee, doesn’t really impact earnings all that much. That might be revenue of a couple hundred million dollars annually, albeit at high margins. But Facebook is likely to earn over $20 billion in 2019 alone.

Is Facebook Stock a Buy?

That said, there is a bull case for Facebook stock. I argued last month that the company had a path to retake record highs next year … I still believe that’s the case. For all the coverage of the company’s various scandals, they’ve had no discernible impact on revenue growth or advertiser demand. FB stock remains reasonably cheap. Better monetization of Instagram and WhatsApp will follow in coming years.

To be sure, there are near-term risks. The new, clearer, regulatory worries may keep a lid on Facebook stock, though I agree with others who believe the likelihood of a breakup is minimal. Tech stocks on the whole are selling off, though the declines in FB and GOOGL are in part a cause of that sell-off. (Those declines also are pushing indices lower.)

Longer-term, I still believe Facebook stock has upside. And cryptocurrency may, at some point, be part of those gains. But the case here is based on a sober understanding of the company’s role in online advertising – and requires an intense focus on its user growth and engagement. Cryptocurrency will be fun to watch but it’s not going to matter much to the FB stock price.

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

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