One characteristic of great companies is the ability to turn a crisis into an opportunity. And, we are witnessing such a scenario in real-time with Facebook (FB).
First, let’s recap some of the challenges for the company. Apple’s (AAPL) new iOS14 has much tighter privacy controls which limit the use of FB’s ability to track data and sharing unless users will opt-in. Obviously, this will hinder FB’s efforts to target the most effective ads to users.
There’s also an increasingly bipartisan consensus that there needs to be increased regulation on “Big Tech”. Particularly for FB, there are concerns about censorship, “fake news”, and market power given its size. Many legislators are looking at Section 230 which absolves tech platforms from liability of what users post or do on their websites.
The combination of rising interest rates and an improving economic outlook has led to a rotation out of many tech stocks with high growth rates that outperformed in 2020. As a result, FB is essentially flat over the past seven months, while the S&P 500 is up 15% over the same time frame.
While these are significant challenges, I believe that they are creating an attractive entry point for investors. Facebook is meeting these challenges head-on and using them as opportunities to grow their business in new, innovative ways.
iOS14 Privacy Changes Could Accelerate FB’s Ecom Business
While Apple’s announcement about changes in its new OS drew some sharp rebukes from FB, the company has quickly accepted these changes and is looking to diversify its business away from ad-delivery.
While the change would mean that its ads would be less effective, the company sees more businesses selling directly through Facebook or Instagram as a result of these changes. In an interview, Zuckerberg said, “It’s possible that we may even be in a stronger position if Apple’s changes encourage more businesses to conduct more commerce on our platforms by making it harder for them to use their data in order to find the customers that would want to use their products outside of our platforms.”
Essentially, many of the companies who advertise on Facebook may end up selling through the platform. FB takes a cut of each sale. In the long-term, this would amount to more revenue and earnings as gross sales on the platform would increase. Like other e-commerce platforms, FB would be able to offer vendors additional products and services to help them grow their business.
Another way in which FB is acting vigilantly concerns Section 230. While most expected that FB would vigorously contest any effort to repeal or reform this law, they seem to be welcoming these changes.
In his Congressional testimony, Zuckerberg said that platforms should only be granted immunity if they follow “best practices”. There’s been considerable speculation about the change in the company’s position.
It’s likely that FB understands that some reform is likely given political changes and shifts in public opinion. Additionally, the company has the resources to implement these “best practices” which would more significantly impair its competitors and certainly hinder and startups’ attempts to capture market share.
In essence, this reform could widen and deepen the moat around FB’s business as it would be best-equipped to comply with more stringent regulations and increased liability.
Macroeconomic conditions have certainly gotten worse for tech companies over the last few months. However, Facebook has continued to execute, grow earnings, and more effectively monetize users.
This is reflected in the company’s 75% earnings growth and 33% revenue growth over the last quarter. It also sports a very healthy 33% profit margin. Despite this, it has a forward PE of 20 which is cheaper than the market average.
These positive fundamentals are also reflected in FB’s POWR Ratings. FB is rated a B which equates to a Buy rating. B-rated stocks have an annual average performance rating of 19.7% which compares favorably to the S&P 500’s 7.3% average annual gain.
The POWR Ratings also evaluates stocks by different components. It’s not surprising that FB also has an A for Sentiment given its recent underperformance and the negative headlines surrounding the stock. Often, the best investment returns are in stocks with bearish sentiment.
FB is also evaluated by other components including Value, Growth, Quality, Momentum, Industry, and Stability. For more information, click here.
While many investors have been shunning Facebook due to these issues, I believe that the stock is not a sell, but rather a buy, as these are actually going to accelerate the company’s growth. Apple’s privacy changes will force more businesses to use Facebook to sell directly rather than as a place to buy ads which will bring in higher revenue in the long-term.
Reforms to Section 230 are likely to hurt Facebook’s competitors more than Facebook. Many believe that Facebook could introduce a product to help other platforms deal with increased liability in the same way that Amazon (AMZN) eventually was able to turn its in-house logistics solution into a product.
Finally, the company is attractively priced and growing at a rapid rate. While the economic environment is less favorable for tech companies, Facebook is an exception.
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FB shares were trading at $290.82 per share on Monday afternoon, up $7.80 (+2.76%). Year-to-date, FB has gained 6.47%, versus a 6.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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