FB stock has powered past Covid and a high-profile boycott this year. Facebook‘s (FB) business is on a major roll. And its Q3 earnings suggest it can overcome worries about a post-Covid slowdown. Yet now the FANG stock has another threat to overcome: antitrust lawsuits filed by the federal government and 48 states.
On Wednesday afternoon, the Federal Trade Commission and 48 state attorneys general filed separate antitrust cases alleging that Facebook’s acquisitions of Instagram and WhatsApp were anticompetitive in nature and intended to bolster its monopoly position.
FB stock fell nearly 2%, matching the Nasdaq composite’s loss on a bad day for tech stocks. Yet the social media giant found support at its 50-day line. Facebook stock actually closed slightly above where it was when news of the antitrust action hit in late-day stock market action.
FB stock managed to outperform a couple of other FANG stocks, Amazon (AMZN) and Netflix (NFLX), on the day. While the government cases seek remedies that would be highly disruptive, antitrust cases can take years to play out. So is now a good time to buy FB stock?
Facebook Hit With Antitrust Action
The stakes in the Facebook antitrust suits are immense. Here’s what the FTC wants: “divestiture of assets, divestiture or reconstruction of businesses (including, but not limited to, Instagram and/or WhatsApp), and such other relief sufficient to restore the competition that would exist absent the conduct alleged in the Complaint, including, to the extent reasonably necessary, the provision of ongoing support or services from Facebook to one or more viable and independent business.”
In other words, the FTC wants Facebook broken up to create the same level of competition that would have existed without the mergers. On top of that, Facebook should provide ongoing resources to ensure that the competition is robust.
The government suits provide a long evidentiary trail backing up their allegation that Facebook was intent on quashing key competitors with its acquisitions. The FTC signed off on the mergers, but reserved the right to review the decisions.
Undoing its 2012 Instagram or 2014 WhatsApp deals so long after the fact “would send a disquieting message to the business community,” Facebook argues. The comment comes from an Oct. 4 Wall Street Journal report on the antitrust defense being prepared.
FTC Chairman Joseph Simons has said that Facebook’s integration of its Messenger, WhatsApp and Instagram properties would complicate a breakup. Facebook’s defense makes the same point: The company would spend billions to maintain separate systems. Security and users’ experience would suffer.
If the government is successful, might the sum of Facebook’s parts be more valuable than the whole? The argument has been made in the past. Yet Facebook’s grand vision involves integrating the three properties.
The integration announced in early 2019 “to let people message across apps” is making strides, CEO Mark Zuckerberg said on the Q3 earnings call.
“When a small business sets up a shop, they can now establish or will be able to establish a commercial presence across Facebook, Instagram and WhatsApp all at the same time,” Zuckerberg said.
“Soon, you’ll also be able to click a WhatsApp icon on a Facebook Shop to chat directly with the business,” COO Sheryl Sandberg added.
FB Stock Analysis
Since hitting an all-time high of 304.67 on Aug. 26, FB stock has carved out a 14-week cup-with-handle base. FB stock’s postelection rally high of 297.38 on Nov. 5 marked the start of the handle, according to a MarketSmith analysis. The buy point is 10 cents above the highest point on the handle.
However, the FB stock chart also offers another entry point that more aggressive investors can eye: 10 cents above the 291.78 high on Dec. 2. That was the peak of the latest failed rally attempt. That came as FB stock bounced off its 10-week and 50-day line.
Facebook stock sank 2.2% last week amid the antitrust lawsuits, though that news didn’t seem to have much impact on the share price. The FANG stock closed the week just below its 50-day and 10-week lines once again.
After a stellar first eight months of the year, FB stock’s performance has dimmed a bit recently. Facebook’s relative strength line, the blue line in the charts provided, has come off its highs since late August, especially since late October, to the lowest since the end of July. The RS line indicates that FB stock, amid ups and downs, has basically matched the S&P 500’s performance since late May.
The social media giant easily surpassed third-quarter earnings estimates. It posted an adjusted profit of $2.40 per share, up 13% from a year ago, excluding a 31-cent tax benefit. Revenue grew 22% to $21.5 billion. That topped $19.8 billion estimates and doubled Q2’s 11% growth rate.
Facebook stock initially traded lower after the late-day Oct. 29 earnings report. Investors appeared to focus on a slight decline in daily active users in the U.S. and Canada to 196 million from 198 million.
Facebook had previously warned that a spike in use of the social media app that occurred early in the pandemic would moderate as life normalized. And it began to over the summer. The trend of flat or slightly lower daily and monthly active users will likely continue in Q4, Facebook said. Yet, despite that headwind to growth, Facebook revenue actually accelerated through Q3.
In late July, management had said that Facebook revenue was growing about 10% from a year ago early in Q3. However, that is far below the 22% growth rate for the full quarter.
“We expect Q4 growth to be higher than the reported growth rate in Q3, because obviously we saw August and September being stronger,” CFO Dave Wehner told analysts.
It’s not clear how much Facebook revenue growth in July was held back by a high-profile ad boycott targeting its perceived tolerance of racially offensive speech. Management has since taken steps to address.
The bigger picture is that Facebook advertisers, a group which has grown to 10 million businesses, are using the social media site to connect with prospective customers like never before.
Q3’s 22% growth came as ad impressions served across Facebook properties grew 35% from a year ago. Meanwhile, the average price per ad decreased 9%. That latter figure was a big improvement over Q2. That quarter the average purchase price through Facebook’s ad auctions fell 21%.
Facebook’s Diem Dollar
Facebook’s entry into the cryptocurrency space, first announced in mid-2019, looked all but dead after Fed Chair Jerome Powell and international regulators raised serious doubts about the plan. Yet the company has quietly moved forward with an approach considered somewhat less controversial. On Dec. 1, the Libra Association behind Facebook’s cryptocurrency renamed itself the Diem Association to go with the renamed Diem Dollar cryptocurrency. Instead of its original plan for a stablecoin with a value pegged to a basket of currencies, Facebook now plans a coin pegged only to the dollar. The company hopes that change, along with a new focus on anti-money laundering, will meet the demands of regulators.
The Financial Times reported that Facebook is hoping to launch its Diem cryptocurrency in January in the U.S. and some Latin American countries. Facebook still needs some state approvals for its Novi digital wallet. Additionally, the Diem cryptocurrency plan needs approval from Switzerland’s Financial Market Supervisory Authority. That’s where the Diem Association is based.
Yet just as Facebook revived its cryptocurrency plan, a group of House Democrats introduced the Stable Act. The bill would require stablecoin issuers such as Facebook to get a banking charter. It also would provide for a 6-month review by the Fed and FDIC before issuance.
Facebook Business Developments
Facebook still has plenty of untapped potential that has Wall Street excited, apart from its cryptocurrency venture. In August, it began taking on TikTok with the newly launched Instagram Reels. And the long-term effort to monetize the massive WhatsApp user base is just getting started.
Facebook has announced 2021 capital spending of $21 billion-$23 billion, driven by investments in data centers, servers, network infrastructure and office facilities. Some of the growth vs. a $16 billion estimate reflects delayed construction due to the pandemic. Still, RBC Capital Markets analyst Mark Mahaney wrote that the implied 31%-44% increase shows Facebook is “investing aggressively in innovation from a position of strength.”
Release of the $300 Quest 2 virtual reality headset should provide a boost to Q4 revenue. “Preorders have outpaced the original Quest preorders by more than 5x and have surpassed our expectations,” Zuckerberg said.
Facebook has warned that ongoing privacy regulation and changes in mobile operating platforms, notably the Apple iOS 14, could impede ad targeting and weigh on ad pricing. However, Apple delayed the most important change until early next year.
How Much Is FB Stock Worth?
Facebook stock has a market cap of $779 billion. That makes FB stock the fifth-most-valuable company on the S&P 500 index, behind Apple (AAPL), Microsoft (MSFT), Amazon and Google-parent Alphabet (GOOGL) stock.
FB Stock: Is It A Buy?
Wall Street analysts think this FANG stock still has a long growth runway and provides unmatched value to advertisers. Facebook has proved its mettle during an unprecedented economic downturn.
Facebook stock boasts an excellent 96 IBD Composite Rating. The Composite Rating combines several key fundamental and technical factors into a single score. IBD research shows all-time stock winners often have a Composite Rating of at least 95 near the start of big runs.
All that potential makes it dangerous to bet against FB stock, even as it faces a long antitrust battle. Yet investors who want to bet on Facebook should wait until it again demonstrates its resilience by reaching a proper buy point.
Bottom line: FB stock is not a buy right now, but could be soon.
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