Facebook (META 0.43%) joined the other tech giants in the four-comma club on Monday.
The social media giant temporarily topped $1 trillion in market value, rising 4.2% after the District Court for the District of Columbia threw out an antitrust suit filed by the Federal Trade Commission (FTC) and more than 40 states.
The decision alleviates Facebook's biggest risk -- that it could be broken up or face stricter regulations, for now. But the FTC will have a chance to regroup and refile its claim in 30 days. Will new investors be glad they got onboard today, or might they be disappointed if regulators eventually prevail?
Image source: Facebook
What happened in court
In court, Judge James Boasberg dismissed the FTC's complaint as "legally insufficient" and said the FTC was unable to adequately define the market that Facebook dominates (calling it "personal social networking services") or find a valid way to measure its control of that market as conventional metrics like revenue don't apply to its user base.
It's easy to see why Facebook investors rejoiced at the news. For a while, the biggest threat to the company has been on the regulatory front, and plenty of investors have sold on fears of a crackdown. In 2019, the company paid $5 billion in FTC fines, and with its ownership of both Instagram and WhatsApp, its domination of social media seems self-evident to many. Judge Boasberg even acknowledged that the FTC "is on firmer ground in scrutinizing the acquisitions of Instagram and WhatsApp."
Above all, the decision shows that breaking up or restraining Facebook isn't an easy case to make in the courts, especially in the fluid environment of social media where new rivals like TikTok can emerge almost overnight.
The benefits of a bogeyman
For years, Facebook has traded at a discount. In the wake of the 2016 election and the Cambridge Analytica scandal, conventional wisdom said that Facebook would ultimately face a sustained backlash by at least one group of stakeholders, either users, advertisers, or regulators. Despite plenty of controversy and active efforts to stem its growth and change its business model, Facebook has emerged relatively unscathed.
Following the murder of George Floyd last year, some of Facebook's biggest advertisers banded together in a boycott under the Stop Hate for Profit campaign. The company still reported 22% revenue growth in the quarter the boycott was active. #DeleteFacebook campaigns have trended multiple times on Twitter and other social media platforms, but Facebook's global user base grows every quarter. Despite the FTC's $5 billion fine, regulators' efforts to rein in the company have done little to impede its growth.
But as a result of those fears, the stock has almost always been cheaper than it should be for a company with its competitive strengths and growth rate. With the exception of the first half of last year during the height of the pandemic, Facebook has never had a quarter with less than 20% revenue growth. The stock has gained more than 800% since its 2012 IPO, and its operating profit margins, which reached 43% last quarter, are better than almost every other publicly traded company. You could have purchased Facebook stock at almost any point in its history and be beating the market today.
Considering all those factors, you'd expect the stock to be expensive, but it still trades at a price-to-earnings (P/E) ratio of 30 compared to the S&P 500's 46.
At that valuation, investors still seem to be treating Facebook as a company that has reached maturity, will ultimately be crushed by regulators, and doesn't have tons of optionality left in areas like e-commerce, virtual reality, and payments.
The regulatory bogeyman isn't going away anytime soon, especially with new FTC chair Lina Khan expected to go after big tech. But for optimistic investors, that looks like good news, as it makes Facebook stock undervalued.
In a frothy market with valuations stretched across much of the tech sector, Facebook is one of the few no-brainer bargains you can count on today.
