Why Facebook Probably Won’t Outperform the Market

Facebook (NASDAQ:FB) stock has not outperformed the market by very much over the last 26 months. Specifically, since July 2018, Facebook has climbed 27%, while the SPDR S&P 500 ETF Trust (NYSE: SPY) has risen by about  24% during the same period. In 2020, the Nasdaq is up 24%, versus the 26.5% gain of Facebook stock, while the Nasdaq 100 ETF has outpaced Facebook by a few percentage points so far this year.

As Free Cash Flow Continues Rolling, So Will Facebook Stock
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A number of issues have weighed on the social media giant’s shares during that stretch, including increased competition, its involvement in political controversy, the threat of government intervention against it and moves by Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) that may be hurting its business.

I believe that these threats, if anything, are likely to intensify going forward, preventing Facebook stock from outperforming the market.

Snapchat Becomes a Factor

Facebook stock bulls have made the point that, while the flagship Facebook website has become less popular with younger people, Instagram is still attracting the younger crowd. They’ve added that Facebook has managed to incorporate the most popular features of Snap’s (NYSE:SNAP) Snapchat into Instagram.

But the fact that Facebook is facing any meaningful, direct competition at all is a big change. For many years, Facebook was really the only game in town when it came to long-form social media.

That, of course, has changed, now that Snapchat is attracting a meaningful amount of revenue and users. In the second quarter, Snap’s daily active users jumped 17% year-over-year to 238 million, while its revenue also surged 17% YOY to $454 million.

I believe that Snap’s strength is a key reason why Facebook’s revenue rose by a less-than-impressive 11% in Q2.

Competition Gets Tougher

Other developments involving Facebook’s competitors have likely hurt the company’s results and Facebook stock as well. Specifically, in recent years Amazon’s (NASDAQ:AMZN) digital-ad business has grown rapidly, likely taking some revenue away from Facebook. And, as I noted in a previous column, Alphabet:

“made it more difficult for other websites, including Facebook, to trace the surfing history of consumers through cookies. Given this change, Facebook ads will become much less valuable to advertisers since it will be harder to target the users on Facebook who are most likely to buy their offerings.

If anything, these negative competitive trends are likely to intensify in coming years.

As Snapchat’s users get older and earn more money, the website is likely to attract a greater share of digital ads. As Amazon’s overall business continues to surge, its digital-ad revenue is likely to continue to rapidly grow. And Alphabet’s disempowerment of cookies will not be complete until 2022, so the impact of that phenomenon on Facebook could very well increase going forward.

Political and Regulatory Pressures

Facebook continues to come under intense pressure from both sides of the political spectrum. Just on Sept. 29, Joe Biden’s political campaign wrote a scathing letter to the company, accusing it of “regression” when it comes to allowing alleged disinformation about the 2020 presidential election to be broadcast on its website.

As is well-known, many large advertisers are boycotting Facebook amid controversies about its political-content policies. And from the right side of the spectrum, as I noted in a previous column, President Donald Trump is looking to take away the company’s protection against lawsuits over its content.

Moreover, to that end, the Department of Justice recently asked Congress to make it easier to sue Facebook and other social-media websites over their content.

In the regulatory arena,  the FTC is considering filing an antitrust lawsuit against Facebook this year. As I’ve noted in the past, I think investors would react negatively to such a lawsuit because it could force the company to separate the Facebook website from its other assets.

As a result, investors who buy Facebook stock would no longer be able to benefit from both huge cash generation and great growth prospects. Additionally, the company’s other assets would not have access to nearly as much capital to fund their growth.

The Bottom Line on Facebook Stock

With Facebook facing so many threats and trading at a forward price-earnings ratio of 23.5 and a trailing price-sales ratio of 9.5, which aren’t low, the shares are unlikely to outperform the market going forward.

Investors looking to beat the market should buy other, faster growing names that are facing less onerous threats. Snap, Roku (NASDAQ:ROKU), Overstock (NASDAQ:OSTK) and Fastly (NYSE:FSLY) are in that category.

On the date of publication, Larry Ramer held a long position in Fastly. 

Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.


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