Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and others have seen a resurgence as of late. FB stock hit a new all-time high this week, while TWTR stock has rallied more than 65% from the lows. But now, each of the social media stocks face an interesting threat: the White House.
Let’s not get political here. There are plenty of places to have that debate. But from the current situation, it’s clear that President Donald Trump is taking aim at social media stocks. This came after one of his tweets — referring to mail-in ballots — which was assigned a fact-checking label from Twitter.
That didn’t sit well with the President, who later tweeted about social media platforms, saying “we will strongly regulate, or close them down.”
Politics vs. Platform
This is sure to create a firestorm of controversy. Supporters of the move will feel that they are finally done being suppressed. The opposition will feel that it’s an overreach by the government. However you slice it though, it’s understandable why social media stocks are under pressure on the news.
Companies like Facebook and Twitter sidestep much responsibility when it comes to the content on their sites. Reportedly, the Administration is planning an executive order in an effort to punish these companies by giving regulators the ability to rethink the law that protects these companies’ liabilities.
While it will create a stir, it’s hard to imagine how far an order like this could reach. In a pro-business country like the U.S., there will surely be those that push back. Some have already said that the orders will be nothing but an “empty virtue signaling to his base.” Others have argued that Trump will have no legal authority in the matter.
So where does that leave Facebook’s stock? Clearly there is pressure from the White House and that presents risk. Whether that risk is meaningful is hard to say. But when risk increases, stock prices tend to decrease. Now it’s a question of how much pressure these stocks will face.
Sizing Up FB Stock
Unless this executive order carries some real meat on the bone, it’s unlikely to have a lasting effect. It may create a short-term dip in Facebook and its peers, but it’s unlikely to create lasting selling pressure unless the threat has serious consequences.
With that being said, did Facebook’s stock really deserve to be trading at all-time highs anyway?
While the digital ad market appears to have bottomed in April — at least, according to our outlook on the company’s recent quarter — it still took a big hit.
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Three months ago, estimates for 2020 called for earnings $9.14 per share. Now those estimates stand at just $7.57 per share, down more than 17% from the estimate 90 days ago. However, if Facebook achieves that figure, it will still represent year-over-year growth of 17.7%.
Further, analysts expect revenue to grow about 10% in 2020. Both earnings and revenue growth are forecast to accelerate in 2021, up 29.6% and 24%, respectively.
This acceleration coupled with the fact that business is still growing this year — and not falling off a cliff — has investors willing to pay a premium for FB stock.
Other Considerations
Allow me to make a few other points regarding Facebook. First, remember that investors are willing to pay premiums for companies with growth. In an environment that is severely lacking profit or sales growth for many businesses, those that can generate any growth at all are suddenly more valuable. Those that can generate above-average growth — like Facebook — are worth even more.
So while paying 30 times this year’s earnings feels expensive, one must remember investors are flowing into stocks that have proven growth. That said, the political situation could give investors a reason to lock in some profit. Should that create a dip, it’s one we’ll eventually want to buy.
Remember, Facebook is the most profitable name in the FAANG group by gross and net margin. It has $69.3 billion in current assets vs. current liabilities of just $15 billion. Cash and short-term investments top $60 billion.
In short, this stock is a profit machine with an enviable balance sheet. Unless the political situation has some seriously sharp teeth, let’s look to buy FB stock on the dip.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
