Easily one of the most controversial blue chips in the markets today is Facebook (NASDAQ:FB). Most notably mired by the Cambridge Analytica fiasco, Facebook stock has faced other PR challenges, including accusations of facilitating housing discrimination and privacy breaches.
If that weren’t enough to cloud the FB stock price, the social media giant also suffered internal executive-level strife. Despite serious pain, the public outrage against Facebook didn’t let up. With data privacy becoming a hot-button issue, notable political figures like democratic presidential candidate Andrew Yang have criticized the company’s perpetuation of Silicon Valley elitism.
That said, Facebook stock has one notable ace up its sleeve: domination of its core industry. Like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and its Google search engine, its hard to do anything online without a Facebook account. This is especially true if you run a business or even a non-profit organization.
Social media is what the internet was in the 2000s, and the yellow pages during the analog era. In other words, if you want any kind of exposure, you’ve got to have a strong social media presence. Thus, the FB stock price has serious pull, even under trying conditions.
So, how should investors respond? Is Facebook stock an opportunity or are the high-level and political distractions too much for Mark Zuckerberg and company?
Typically, I try to give a measured response in my single company features. However, in my view, the quantifiable evidence is overwhelming: the FB stock price will likely move higher, perhaps to $250 to $300 over the next few years. Let’s dive into my reasoning:
Facebook Stock and Social Media Market Share
Obviously, social media firms live or die on traffic and engagement. Without both metrics moving higher or stabilizing at lofty levels, the target platform is not attractive to advertisers.
One of the critical reasons why Facebook stock dominates its core market is that no other competitor comes close. Whether we’re talking sheer numbers, demographic balance, or utility, Facebook wins out.
Therefore, it’s fair to assume that the FB stock price and the company’s market share in the social media industry will be closely correlated. Between May 2012, when FB made its Nasdaq debut, until May 2017, the company’s share price and its market share recorded a 91% correlation coefficient.
Simply put, as more people used Facebook, the FB stock price generally increased in value. However, this strongly correlated relationship started to crumble from June 2017 onward, for reasons I’ll explain later. But fast forward several months to March 2018, and we find ourselves staring at a major controversy.
That was when the New York Times released a damning expose of Facebook, revealing that Cambridge Analytica used FB subscriber data to help Donald Trump’s campaign. It was a double whammy because people hate privacy violations and Trump isn’t exactly a popular president. Just before the Times’ expose until recently, Facebook stock entered a frustrating, long-term consolidation phase.
However, I believe that the FB stock price is now primed to break out of this consolidation to the upside. Primarily, rationality has entered the space. In 2019, the correlation coefficient between the stock and Facebook’s market share has registered 48%. In 2018, there was virtually no correlation at all.
This is a big clue that investors now are buying Facebook stock for the expected reason: dominance in social media and ad-related revenue opportunities.
Competition Making Way for FB Stock
Another major reason why I’m bullish on the undisputed social media king is the competition; namely, they just can’t compete consistently and effectively against Facebook stock.
Above, I mentioned that the relationship between FB and the company’s market share started to deteriorate after May 2017. This trend has one unmistakable explanation: competing platforms temporarily stole the limelight from Facebook.
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In that month, Facebook’s social media market share was 87.8%. By December of 2017, this metric dropped to 75.5%. During that period, Pinterest (NYSE:PINS), Twitter (NYSE:TWTR), YouTube and Instagram (which is Facebook-owned) dramatically increased their market share metrics.
However, the problem for the suddenly emergent competitors was that they couldn’t build off the initial momentum. For instance, Pinterest’s market share has gyrated wildly. And throughout this year, Pinterest has been losing market share.
That bodes well for Facebook and Instagram, as they’ll be more than happy to increase their footprint. Moreover, we have a critical election year coming up. I don’t think it’s any coincidence that Facebook’s market share increased to near record highs in 2016. Thus, we could see another surge in 2020 as liberal and conservative users attempt to sway the vote in their favor.
Bad News in the Rear View
Although many people still consider Facebook as a bad actor, I think these hardline views are fading.
In many ways, FB is too big to fail or to break up. That’s because the massive size of the platform is what makes it so useful. Essentially, it’s a human database. While the ability to abuse such a system is unfortunately real, I believe that the positives far outweigh the negatives.
Just as importantly, Facebook has the power to influence. That wouldn’t be possible if the company didn’t have the reach it has. And with Tuesday, Nov. 3, 2020 less than a year away, this isn’t the time for political advocates to squabble over technicalities and past misgivings. Ultimately, this too is a catalyst for Facebook stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
