There were many big stories in 2020, including a presidential election and a global pandemic. Then there was Facebook (NASDAQ:FB). After years of sparring with regulators, in December Facebook was slapped with antitrust lawsuits by the Federal Trade Commission (FTC) and 46 state attorneys general. They are demanding a breakup of the company. Facebook would be forced to divest itself of Instagram and WhatsApp. FB stock is currently down more than 11% from its pre-lawsuit 2020 high. Tempting, but given the situation, is this any time to be thinking about a Facebook stock investment?
The legal uncertainty hanging over the company contributes to Facebook stock’s “B” rating in Portfolio Grader. At the same time, the dip in FB is an attractive buying opportunity.
Whether you act on the opportunity depends on what you feel the outcome of the legal action against Facebook will be. I’m in the camp that feels ultimately it will come down to a big fine and closer regulation. Neither of these measures would hurt FB’s long-term prospects. Here’s what you need to know about the situation.
Protecting a Perfect Business Model
Facebook has had a decade and a half to perfect its business model. The service actually started in 2004, but it wasn’t until September 2006 that it actually began letting the general public sign up for accounts. Since that time, it has honed its money-making capability. In the last quarter, that amounted to revenue of $21.47 billion — up 22% year-over-year, despite a pandemic.
In 2018, CEO Mark Zuckerberg was testifying before Congress as Facebook went through an early round of investigation. At that time, University of Virginia Media Studies Professor Siva Vaidhyanathan described the company’s mode of operation:
“It wants to discern patterns so that they can see what we like, who we care about, how passionately we care about certain things. And then, when it can mathematically distill those patterns, it can compare us to other people like us. That helps them put more things into our news feeds that are likely to generate interest, which hooks us even more. It’s the most effective advertising system ever created by our species. As a result, it’s making tremendous amounts of money. The business model is not flawed; it’s perfect.”
Increasing government scrutiny put Facebook on the defensive, making moves to protect that perfect business model. Over the past two years, these measures have included:
- Preventing housing, employment or credit ads from targeting users based on personal information such as ZIP code, gender or age
- Removing harmful content related to the novel coronavirus pandemic and banning ads for PPE
- Taking measures to protect the 2020 election, including refusing to accept new political advertising in the week before the election and labeling content that delegitimizes election results
- Sending notifications to users who have engaged with posts on key subjects (such as Covid-19) that have been labeled as misinformation
With the government pressure ratcheted up to maximum, Facebook will continue to take action through 2021 in an effort to placate regulators.
Will Facebook’s Efforts Prevent a Breakup?
Anyone who is considering buying Facebook stock wants to know one thing: Will the company be broken up? Will Facebook’s efforts result in a warning and a fine, or will the government move to break the company up? At this point there are mixed opinions.
Those that see a breakup as a possibility include University of Miami Antitrust Law Professor John Newman. He told Bloomberg, “there’s a pretty strong a chance a judge will find a violation of the antitrust laws.” He went on to say that if that happens, a breakup would likely be the “default” solution.
On the other hand, a former tech CEO, whose company went through the antitrust wringer in 2000 and survived, thinks that even if the FTC rules in favor of a Facebook breakup, that ruling would be pulled back after reaching a settlement. Steve Ballmer told CNBC, “I’ll bet money that they will not be broken up.”
One thing to keep in mind is that even if Facebook must divest itself of assets like Instagram, it will take time. The actual ruling must be made, then there will be appeals and then a deadline. Considerable engineering would have to be completed to physically separate the services. An actual breakup would likely be years away.
Bottom Line on Facebook Stock
There is no doubt that Facebook faces challenges in 2021. However, it seems highly unlikely that anything is going to happen in the next year to derail the social media behemoth. That makes the current dip in FB an attractive proposition.
If it helps you to feel more comfortable, consider the wide spectrum of investment analysts who cover Facebook stock. Despite the current situation, they are overwhelmingly bullish about FB. Those tracked by the Wall Street Journal have FB rated as a consensus Buy, with a $325.45 average 12-month price target. That’s a big vote of confidence that Facebook stock will not just rally, but surge back into growth territory for 2021.
On the date of publication, Louis Navellier had a long position in FB. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation.