The recent fall in Facebook (NASDAQ:FB) stock is based on a misunderstanding of what the company is.
The assumption is that Facebook is an American media company, built on advertising. That would make it vulnerable to a boycott by American advertisers upset that it still lets the President’s supporters make full use of the service. The boycott, so far, has wiped $60 billion off Facebook’s market cap.
But Facebook is not a media company. FB stock is a Cloud Czar. It’s one of only five companies whose networks of cloud data centers control the internet. It’s not American anymore. Only 10% of its monthly active users are in the U.S. or Canada, 41% are in Asia.
India is now Facebook’s largest market.
Local Ordinances
What I wrote in the 1990s holds true for Facebook today. The First Amendment is a local ordinance.
That means Facebook must navigate between the rulers and the ruled everywhere it does business and hew to one policy everywhere. How might Indian President Modi react if Facebook decided to exile the American President’s supporters because their content wasn’t trustworthy? How might dozens of African dictators, whose people have become equally dependent upon Facebook, react to its taking a political side?
Of the 10 largest social networks, based on their number of users, Facebook owns four — Facebook itself, Facebook Messenger, Whatsapp and Instagram. Facebook’s services are now integral to the global economy, not least because they’re free. In countries like India, where the median income household income is $3,168, that’s important.
Because Facebook owns its own cloud, it can deliver things like shopping malls or banking with instant credibility. Banking and shopping services aren’t dependent on advertising. The global pandemic offers a unique opportunity to launch them.
Betting on Zuck
There is a huge risk in FB stock. There is a reason its price-to-earnings ratio has fallen to 30 despite it taking nearly one-third of its revenue to the net income line. Facebook’s first quarter revenue was also up 17% from a year earlier.
The risk is named Mark Zuckerberg. Over the last year he has taken as much control over Facebook as Bill Gates had at Microsoft (NASDAQ:MSFT) during its heyday. In Gates’ 35th year his company had revenue of $1.18 billion. Facebook’s revenue last year was over $70 billion.
Zuckerberg has repositioned Facebook as a global communications company. Companies like AT&T (NYSE:T), which held this position in the past, cast themselves as common carriers. They were required to provide service regardless of its content, while complying with government orders on things like wiretaps.
In 1990, of course, communications mainly meant voice. Today, it means anything that can be digitized. In 1990, most communication was two-way. Today anything can be broadcast, and often is.
This makes Facebook far more powerful than AT&T was and, because of its global footprint, far more vulnerable. If Facebook defies Trump, won’t it defy Modi? If Facebook pays Rupert Murdoch for news in Australia, how long before it’s paying him in the U.K., or the U.S.?
The Bottom Line on FB Stock
While delivering record first quarter earnings, Facebook warned of an uncertain outlook due to the pandemic. It withdrew earnings guidance and said it would cut expenses by $3 billion thanks to the impact of the novel coronavirus.
But its monthly average users surged to 2.6 billion. For all the talk of “delete Facebook” those numbers aren’t declining. Facebook’s new “manage activity” function makes self-censorship even easier.
Zuckerberg faces a challenge in navigating between politicians and their people, not just in the U.S. He faces a challenge in creating services that can ride on more than ad revenue. But his cloud gives Facebook (and by extension FB stock) the scale and power to meet both these challenges.
Facebook is the world’s fifth most-valuable company for a reason. That reason is the cloud. And the next target, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), is only $400 billion in market cap away. Mark Zuckerberg is 35. He can get there.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in FB and MSFT.
