Investors sold off Facebook (NASDAQ:FB) stock on June 3 when the Federal Trade Commission (FTC) opened an antitrust probe of FB. This has become part of a government probe on big tech in general. It also is the latest in a series of investigations of Facebook’s business practices. Facebook stock subsequently recovered all the ground it lost in the wake of the announcement..
FB’s quick recovery shows that Wall Street has begun to see these investigations for what they are—buying opportunities. History has shown that government probes rarely lead to breakups of companies, and that investors who buy the stocks of the companies being investigated when the inquiries are announced usually make meaningful profits.
The Chance to Buy FB Came and Went Quickly
Investors had to act quickly to benefit from the decline of Facebook stock. FB lost 7.5% of its value the day the government announced the inquiry. However, as mentioned earlier, FB stock has already recovered all of that lost value.
The company has faced numerous accusations from both U.S. and European regulatory authorities over the last couple of years. Perhaps such charges no longer phase investors too much. But I believe that the quick recovery of FB stock indicates that investors see little cause to worry about FB at this point.
Both the case itself and the history of antitrust actions indicate that investors have made the right call.Moreover, the justification for breaking up other giant tech companies is stronger than the case for dividing FB. Nobody has to share anything on Facebook. Moreover, unlike Apple (NASDAQ:AAPL), and Amazon (NASDAQ:AMZN), FB does not derive significant revenues directly from tens of millions of consumers. That may explain why Facebook stock climbed back to its previous level so quickly.
Antitrust Probes Will Only Help FB
Here is the dirty secret about antitrust investigation: investors almost always win these battles, and the companies supposedly victimized by antitrust probes fare nearly as well.
For one, such investigations rarely lead to the breakup of monopolies. Just look at the history of Microsoft (NASDAQ:MSFT). The antitrust probe regarding the monopoly power of Windows ultimately led to only mild sanctions. That monopoly power no longer exists, but it was the market (and not the government) that made the dominance of Windows irrelevant. Also, traders should note that MSFT has now achieved record valuations after reducing its dependence on its operating system.
Even on the rare occasions that the government splits companies, investors also fare well. A high-profile breakup occurred in 1911, when the government ordered the break up of Standard Oil into 34 different parts. Rather than disappearing, the various parts of Standard Oil exist more than 100 years later as ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), Marathon Oil (NYSE:MRO), and BP (NYSE:BP).
The 1982 breakup of AT&T was followed by a boom by the telecom industry for the remainder of the 20th century. The break up produced AT&T (NYSE:T), Verizon (NYSE:VZ), and CenturyLink (NYSE:CTL), which have all done pretty well over the decades.
So history shows that a breakup of FB could become a gold mine for investors. The probe could lead to some embarrassment for the company, or even fines. However, once Facebook settles its differences with regulators, FB will resume its positive, long-term growth trajectory.
Final Thoughts on Facebook
Some investors have already benefited from the FTC’s antitrust probe of FB. Facebook stock initially fell. but within a week, it has already recovered. Apparently investors realize that government probes create buying opportunities.
In the future, instead of worrying about the negative impact of investigations on FB, investors should react to the news of such probes by buying FB stock as quickly as possible.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.