Breakup Talk Will Have Little Impact on Facebook Stock

Break-up case is the weakest among mega-techs

Lately, Facebook (NASDAQ:FB) stock can’t avoid talk about the company’s size. Its dominance in the social media space has revived the controversy as to whether the government should break up Facebook.

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Although talk of a breakup could lead to buying opportunities in Facebook stock, Facebook, not the government, will remain its own greatest competitive threat.

Facebook Is Facebook’s Biggest Threat

The company recently rebranded itself as “FACEBOOK.” As Tim Biggam points out, that led to a shrug from traders. It also received ridicule from Twitter’s (NYSE:TWTR) Jack Dorsey.

To be sure, when one thinks of the lessons of the failure of Jeb Bush’s presidential campaign to rebrand itself with the slogan “Jeb!” back in 2016, it seems silly. Traders seemed to agree, as the FB stock price remained at about the same level before and after the news.

However, this image change also serves as a reminder that the biggest challenge for FB stock is Facebook itself. Twitter, Snap (NYSE:SNAP) and Pinterest (NYSE:PINS) have performed well in specific niches. However, Facebook also owns Messenger, Instagram, WhatsApp, and other popular sites. Due to the popularity of these apps, Facebook remains the 800-pound gorilla in the space, and none appear positioned to challenge this dominance.

Still, this market position has led to a sweeping proposal by regulators that could have a dramatic impact on FB stock. The focus has switched to whether government regulators should break up the company. Regulators have also set their sights on tech giants such as Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL), presumably to limit their influence.

Break-Up Talk Will Not Impact FB Long-Term

Still, I think the talk of a breakup is a win-win for FB stock. I think of all the mega-tech names, the government has its weakest case with Facebook.

Economics professor Chad Syverson of the Booth School of Business at the University of  Chicago could not definitively conclude what effects monopolies had on the macroeconomy. Applied to Facebook, this means that it makes little difference to the economy whether people consume social media on Facebook or some other site.

I also think this concept of market power will ultimately prevent a Facebook breakup. Facebook’s market power begins and ends with its name recognition and user base. None of us have to use Facebook. Closing one’s account could lead people to miss some news or some events that others chose to schedule on the app. However, the legal repercussions of choosing to stay off of Facebook’s sites amount to zero.

Moreover, Facebook does not charge its users. Most cases of monopoly relate to economic impacts on consumer pocketbooks. Hence, unlike health insurance or the gas bill at one’s home, the direct impact of Facebook’s on consumer pocketbooks is zero.

Third, technology often breaks up monopolies. In the previous decade, some might recall the failed attempt by Blockbuster Video to take over Hollywood Video. The government felt this would have given Blockbuster a monopoly on video rentals. However, the rise of Netflix (NASDAQ:NFLX) and streaming media made this controversy (and ultimately Blockbuster itself) moot.

Still, break-up talk might affect FB stock shorter term. As I mentioned in a previous article, talk of breakups often leads to temporary selling in an equity. Hence, these probes often bring buying opportunities. Moreover, if the histories of Standard Oil or AT&T (NYSE:T) serve as an indication, the sum of the parts often brings more value than the whole.

On the outside chance the DOJ succeeds in splitting up Facebook, holders of FB stock have few worries. However, given the weakness of this case, I see Facebook remaining its own most significant competitive threat.

The Bottom Line On FB Stock

I see the most significant impact of breakup talk as some possible buying opportunities in FB stock. Since the company does not collect money from users or force people to use their site, the DOJ will probably struggle to build a case. Moreover, even if they did succeed, history shows that holders of FB stock could benefit more in the long run.

For these reasons, those worried about challenges to Facebook stock should shift their focus elsewhere. Specifically, they should pay attention to the most formidable competitor — Facebook itself. (Or is it FACEBOOK?)

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.

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