The narrative surrounding Facebook (NASDAQ:FB) stock appears to stand in stark contrast to its business. Various inquiries by governments have overshadowed the headlines on FB. Though some accusations have affected Facebook stock more than others, it continues to support a relatively cheap valuation. However, it increasingly revealing a Facebook stock driven not by headlines, but more by the nature of its actual competition.
Low Valuation, Accusations Define FB Stock
Great fundamentals and government probes seem to define FB stock. From a fundamentals standpoint, it seems investors have every reason to buy Facebook. It owns four of the six most widely-downloaded apps. It also sports a forward price-to-earnings (PE) ratio of 19.4. Though profits will fall this year, analysts forecast an average earnings growth rate of almost 22.2% per year over the next five years.
Despite this apparent bargain, most of the news around FB stock seems to revolve around government probes, directly or indirectly. Still reeling from charges that Russia utilized Facebook to influence the 2016 presidential election, the platform has announced tighter rules on political ads in the U.S. this time around.
Also, in July, Facebook agreed to pay a $100 million fine to the SEC over the Cambridge Analytica scandal. However, for a $525 billion company, such penalties amount to pocket change. Furthermore, earlier in the summer, the government targeted every FAANG stock except for Netflix (NASDAQ:NFLX). Those stocks face antitrust probes from the Federal Trade Commission (FTC) and the Department of Justice (DOJ) over their market dominance.
Who Is Facebook’s Competition?
All of the probes are noise.
I will sometimes tell people that if you get hit over the head enough times, eventually it just stops hurting. I think that has now happened to FB stock. Charges brought by the U.S. or the EU simply do not influence traders like they once did.
Regarding the antitrust probe, people use Facebook’s products voluntarily. Since the company derives little if any revenue from the consumer, I do not see this causing lasting harm to FB stock. Also, as I stated in an earlier article, Facebook stock recovered within a week of the announcement on the antitrust probe. Investors treated the charges as a buying opportunity and went on with their lives.
More importantly, the investigations serve as a reminder that Facebook’s real competition is Facebook itself. In the social media space, Facebook operates on a higher plain than the likes of Twitter (NYSE:TWTR), Snap (NYSE:SNAP), and Pinterest (NYSE:PINS). Consequently, I would argue that Facebook should not consider these companies “competition” in the traditional sense.
The real task involves keeping stockholders happy. The company has seen its deepest suffering not from what the FTC thinks, but from losing site of the shareholders. FB achieved the dubious distinction of suffering the largest one-day market cap loss in stock market history after announcing its Q2 2018 results. That $119 billion loss in market cap likely caused more pain than any of the headlines.
Moreover, long investors lost big when the 2012 IPO of FB stock flopped. It was only after Mark Zuckerburg figured out how to derive ad revenue from the mobile site that FB took off.
Government inquiries have not affected FB stock as negatively as those events. As investors lose interest in the probes, attention should return to the fundamentals of FB itself. From there, it should continue moving higher.
Where Facebook Should Focus
Most of Facebook’s competition comes from within the company. I do not expect that the battles the company has with both U.S. and EU regulators will end anytime soon. However, I think more investors see these as noise, and each accusation seems to have less effect on FB stock.
Bottom line, interested investors should buy FB stock because it offers long-term profit growth at a relatively low multiple. In time, investor awareness of that fact will only grow. As long as Facebook stays on the same path, owning FB should continue to serve investors well.
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.
