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Is Facebook Stock a Buy?

By Nicholas Rossolillo - Jan 7, 2021 at 9:00AM

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Just when dark clouds start to clear, more roll in.

It's been a wild few years for Facebook ( FB 3.60% ). The world's social media leader has been at the center of multiple controversies, including political intrigue (both parties in the U.S. have their fixations with the platform), data privacy concerns (regarding Facebook's use of personal data), critique of its effect on society at large (the Netflix documentary The Social Dilemma highlights some of the dangers of social networking), and most recently a lawsuit from the Federal Trade Commission (FTC) alleging Facebook has routinely undertaken illegal anticompetitive activity.

Throw in a pandemic that briefly sent digital advertising into a tailspin in 2020, and it's incredible Facebook stock is up some 50% over the last trailing three-year stretch. Who in their right mind would buy Facebook stock right now? I would. And there are 56 billion reasons why.

Not a minimization of the controversy

Facebook stock was a screaming deal during the depths of the pandemic in March 2020 and the months following, but the situation has gotten more complex since then. And though Facebook is back in growth mode -- revenue and net income grew a respective 22% and 29% year over year in the third quarter of 2020 -- shares currently trade for 31 times trailing 12-month earnings.

On one hand, the monthly average user count of a Facebook service increased 14% from a year ago and topped 3.2 billion people globally in spite of all the controversy swirling around the company. Consumers vote with their time and dollars, and clearly Facebook and its subsidiaries Instagram (IG) and WhatsApp remain popular as ever. So the premium-priced stock could still be a great long-term value.  

Four people standing against a wall using smartphones.

Image source: Getty Images.

But the controversies are real and shouldn't be overly minimized. So much negative press could eventually hamper the company's growth, just as it has weighed on its profitability in recent years (most notably from various regulatory fines, including a $5 billion levy from the Federal Trade Commission in 2019 and Facebook's own heavy spending to update its privacy and user protection systems).

The recent FTC lawsuit is also more than just a potential hiccup. If the FTC gets its way, Facebook would be forced to divest itself of Instagram (purchased in 2012 for $1 billion) and WhatsApp (purchased in 2014 for $19 billion). Even though both acquisitions are tiny compared to the more than $770 billion juggernaut Facebook is today, the FTC claims Facebook got where it is by illegally squashing competitors via takeovers like these. Facebook rightfully argues the FTC itself and the Department of Justice signed off on the acquisitions, but that doesn't mean reversing an old decision is out of the question. There's historical precedence here.

The arguments calling out social media's negative influence on society are ones I can't totally get on board with unless those making these arguments include other media companies. Social media does amplify individual voices, including those that may be less than honest and out to harm others. But an advertising-based business that relies on consumer eyeballs staying glued to a screen isn't new. Traditional media (TV, and radio and newspapers before it) have always had similar issues. Demonizing Facebook without calling out its predecessors in media and their negative impact on society doesn't jibe.

Nevertheless, the pressure mounting on Facebook is real, and the company could look very different in a few years. However, Facebook isn't powerless in forging a path forward.

About those 56 billion reasons to buy...

As mentioned earlier, Facebook has had to shell out tens of billions in recent years to make its social networks more user friendly. However, even in tough times, Facebook is highly profitable. It generated net income of $17.9 billion through the first three quarters of 2020 on revenue of $57.9 billion.

And because of years of dominance in social media, Facebook boasted nearly $56 billion in cash and short-term equivalents, $6.2 billion in equity investments, and zero debt on its books at the end of September 2020. These advantages make this one of the wealthiest organizations on the planet equipped with an enviable war chest from which to seed new growth. Its Oculus virtual reality business and growing aspirations in financial technology and digital payments are just two examples with massive potential.  

But what about antitrust risk? In a worst case scenario, Facebook could be forced to sell Instagram and/or WhatsApp. But Facebook is still a dominant force in technology with billions of users globally. And let's not forget that a sale of either subsidiary would potentially equip Facebook with even more cash since both would now be massive social platforms in their own right with hundreds of millions of users.

Then there's the infrastructure behind the scenes that operates Facebook's various social media services. If the lawsuit is successful, what assets (a data center, for example) belong to Facebook and which (if any) get spun off as part of IG or WhatsApp? These are big questions demanding complex answers. But the point is, Facebook would be far from toothless if stripped of Instagram and WhatsApp, and could quickly alter the way it monetizes its massive global operation. Possessing billions of users and sprawling digital assets to support all of those users afford a great many options. 

Risks abound and storm clouds keep stubbornly gathering around Facebook, but I remain a buyer for the long haul. I expect this leader in global communications will be around for a very long time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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