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Wed, September 30 at 4:00PM ET

The Facebook Bears are Overreacting

Facebook isn't a sure bet anymore, but it's still a solid investment for the future

Despite a slew of controversial headlines and privacy questions, social media giant Facebook (NASDAQ:FB) has been able to deliver. The stock is up 25% so far this year, compared to the 14% return that the S&P 500 has produced.

Don't let the bad news over Facebook stock detract you from the fundamentals.
Source: Wachiwit / Shutterstock.com

However, going forward, there are a lot of questions facing FB stock. This leads many investors to question whether they should sell up and quit while they’re ahead.

Strength in Size

There are a lot of potential growth catalysts in Facebook stock’s future. From the firm’s virtual reality plays to its pledge to deliver connectivity across the globe, like the rest of its tech peers, FB has its hands in many pots.

All of this should have some bearing on your decision to invest, but what Facebook boils down to right now, and for the medium-term future, is users and advertising. Social media and advertising are Facebook’s bread and butter. Without these, the company wouldn’t have the ability to even think about other ventures.

There’s a lot to like about FB’s position in the social media space as well. It’s the largest and most popular social media company out there. The firm boasts 1.59 billion daily active users and per-user revenue has grown significantly each year since 2011. The bottom line here is that FB isn’t going to lose advertising dollars as long as people are still using the site.

Switching Costs

However, that brings up a powerful question about the security of Facebook’s position as top-dog. How important is Facebook to its users: can the firm hold on to its title in the long run? Interestingly, that’s a difficult question to answer because of the nature of social media as a “Wasting Time Good.”

A study on valuing Facebook by Cass R. Sunstein from the Harvard Law School suggests that although people like using Facebook and Instagram, they don’t appear to think it adds value to their lives. Thus, a survey of active users showed that nearly half wouldn’t be willing to pay at all to use the service.

On the other hand, users were also unwilling to give it up. While they largely refused to pay in order to use social media platforms, they indicated that it would cost around $100 per month to stop them from using the services. Sunstein said the survey results could suggest that, “Social media is a good that they use, but that they also consider, on reflection, to be useless or valueless.”

Privacy Concerns

Another worrying aspect about Facebook stock is the privacy concerns that have hung over the social media firm’s head for the past year. While the concerns haven’t swayed people from using their Facebook and Instagram accounts, it’s worth considering that a privacy breach that is serious enough could tip users over the edge.

If they already, as Sunstein said, view the service as valueless, and if an added layer of danger arises, many might choose to switch to another site or even give it up completely.

Aside from that, there’s some concern about Facebook’s ability to withstand growing scrutiny from regulators. The privacy breaches are not only damaging to FB’s credibility — it’s damaging to the firm’s bottom line and growth strategy as well.

Facebook recently settled with the Federal Trade Commission for $5 billion, a figure that significantly dented FB’s earnings per share. That’s not where the pain ends though. The FTC has also imposed new privacy checks and restrictions on Facebook’s business, a move that will have a long-lasting effect on the company’s ability to perform.

This scuffle with the FTC probably isn’t the last privacy issue that FB stock will face either. Facebook has to change the way it does business as governments around the world question how it handles data and whether its privacy policy is enough. That shift is an expensive one that will put pressure on margins in the near term.

Where to Go with FB Stock from Here

It’s impossible to predict the future for any stock, but in the tech space that sentiment is especially true. The fact that FB’s business is under regulatory attack is certainly worrying. But for now, the firm’s overall business looks secure.

While the whims of the consumer are certainly a worry in the social media space, Facebook owns four of the most popular communications apps on the planet: that’s about as secure as you can get in this industry. Plus, social media giant still hasn’t monetized WhatsApp, an asset that I believe could become one of the most valuable parts of the company’s business.

Facebook certainly isn’t the runaway growth star it once was, but I don’t think there’s any reason to panic. FB stock’s long-term growth story is intact, and its business looks solid even with the regulatory concerns.

As of this writing Laura Hoy was long FB.

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/facebook-stock-bears-are-overreacting/.

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