It's fashionable in various circles to hate on Facebook (NASDAQ:FB) these days.
Detractors have charged it with being both an enemy of democracy and a greedy monopolist. and the company's reputation has suffered significantly recently. Last summer, a number of its biggest advertisers signed on to the #StopHateforProfit boycott, which accused Facebook of fostering hate speech. More recently, CEO Mark Zuckerberg and his management team were forced to eat crow when the company de-platformed President Donald Trump after Trump loyalists stormed the Capitol, some of whom had organized their efforts on Facebook. Critics have long assailed the company for not doing more to stem violent actors on its platforms.
Whether or not Facebook is good for society is certainly debatable, but one thing isn't: Facebook is an outstanding business, and the stock has been nothing but a winner since its 2012 IPO. Despite the controversy and even a Democratic takeover of Congressional leadership and the presidency, the stock still looks poised for a strong 2021. Here's why.
Advertising will recover
Ad spending on Facebook and elsewhere plunged sharply during the lockdowns last spring and has begun to recover since then, growing by 22% in the third quarter, following 10% growth in the second quarter.
However, the wave of pent-up demand that's likely to hit when the pandemic ends should be kind to Facebook. Not only does the company face easy comparisons with weak growth in 2020, but the small businesses it relies on for most of its revenue will ramp up spending once it's safe for consumers to be out and about again. Facebook should see a surge of interest from businesses like restaurants, bars, entertainment venues, and travel destinations that desperately need customers to come back once the pandemic ends.
Research company eMarketer said in November that the digital ad market is recovering faster than expected and projected growth in social media ad spending to accelerate from 11.4% in 2020 to 21.3% this year. Facebook should benefit from that uptick.
The regulatory threat is priced in
The regulatory threat against Facebook is real. A congressional committee in October accused Facebook of having an effective monopoly in social media, and the Federal Trade Commission sued the company in December along antitrust lines as well. But regulatory woes are like background music for Facebook. It's always there, but it's mostly just noise. The company was handed a $5 billion fine by the FTC in 2019, but the stock barely flinched. The "worst-case" scenario of a company breakup seems unlikely, and even if it came to pass, the business could be more valuable with Instagram as a stand-alone entity.
Despite its track record of strong growth, huge operating margins, and industry leadership, the stock actually trades at a discount to the S&P 500. On a price-to-earnings basis, it's valued at 30.5 compared to a P/E of 38.5 for the broad-market index. That seems like more than enough of a margin of safety to absorb any censure the company may face on the regulatory front.
The year 2020 ended with a bang on the stock market, and 2021 has gotten off to a brisk start as well. There are more than a few indicators that the market has entered bubble territory. Valuations have become divorced from fundamentals thanks in part to loose monetary policy from the Federal Reserve and multiple rounds of stimulus from Congress. Retail investors on Robinhood and other stock-trading platforms have plowed into the market, encouraged by a booming stock market and boredom during the pandemic, and popular investments like Tesla and bitcoin have gone parabolic, aided by little more than market speculation.
No one knows what will happen to the market this year, and the bubble could expand, favoring stocks that have already seen a sudden rise, but there's no doubt Facebook will be standing strong whenever the bubble pops. It has $55 billion in cash and marketable securities and no debt; it generates mountains of profits that underpin its valuation, and its user and advertiser bases have proven to be sticky over the years.
As others have argued before, amid the crisis FAANG stocks have become the new value stocks. Facebook is a prime example of why.