December 2017

It is an interesting time for the so-called “FANG” stocks.

After years of skirting around the issue, Amazon is finally collecting sales tax, the demand for Apple’s iPhone 8 is suspect, and the stock we will be reviewing today, Facebook Inc. (NASDAQ: FB), recently announced plans to add a layer of editorial control over its advertising platform.

Facebook recently admitted that Russian agents purchased political ads on its platform during the 2016 US presidential election, part of a broader campaign to influence the American vote. It has since become clear that Facebook’s touch-and-go, low oversight, and highly profitable advertising business model may be subject to new and potentially expensive regulation that will force the company to screen its advertisers more carefully.

Wall Street showed its displeasure at these developments on the 25th of September, when Facebook Inc. shares tumbled over 4.5 percent in a single trading session.

Are these recent developments the first cracks in a social media Titanic? Or is the recent dip essentially a sale: 4.5 percent off a great stock, get it while it’s cheap!?

Let’s take a closer look.

The relevant key metrics for a stock analysis of Facebook Inc.

About Facebook, Inc.

Since its landmark 2012 IPO, Facebook, after briefly floundering, has steadily and often aggressively become larger and more valuable, going from a market cap of 45 billion to 500 billion.

Facebook is by far the most successful advertiser on social media space. Moreover, the company has made several solid strategic acquisitions, including Instagram, WhatsApp, and several others.

Facebook cofounder Mark Zuckerberg, beneath the nerdy exterior, is apparently a real bruiser in the business world. He has cultivated a reputation for himself in Silicon Valley as an intensely focused and competitive CEO.

Competitors

Snapchat (NYSE:SNAP), which issued its IPO earlier this year, has attempted to siphon off the younger crowd, but has had trouble doing so profitably. Snapchat stock has receded by over 20 percent since its IPO. It doesn’t help matters that Instagram has been imitating much of Snap’s signature ghost-post functionality.

Twitter and LinkedIn are the only two social media platforms that come close (sort of) to rivaling the success of Facebook’s advertising platform.

Current Price / Trend

At the close of trading on the last Monday of September, Facebook was selling for about $163. Most analysts saw the price decline as a correction rather than a sell off. The stock was still up 33% from January of 2017 (Alphabet, Inc [Google]), and, as of September, was up 18% for the year. It is also hard to overlook and be unexcited about the fact that Facebook has returned well over 600 percent back to investors since its 2012 IPO.

The five year trajectory of Facebook Inc. Google and the Google logo are registered trademarks of Google Inc. Used with permission.

Google and the Google logo are registered trademarks of Google Inc., used with permission.

The Experts Say…

Facebook Inc. is a darling among analysts. MarketGrader scores Facebook Inc. Class A shares in the 99th percentile among the 5,824 North American equities that it tracks. MarketGrader, along with the vast majority of analysts, still gives Facebook Inc. a “strong buy” rating.

A minority of analysts give it a “moderate buy” or “hold.” I cannot find any analysts at the moment who are rating it “strong sale” or even “moderate sale.”

My Take

The true Warren Buffett-style contrarian may find a selling opportunity here. Particularly in the short term, with the FANG stocks and the NASDAQ as a whole feeling a bit overvalued, perhaps now is not the right time to go big with a Facebook play.

Google has been a laggard over the last several months, and I can’t help but think that Facebook is headed for some similar short-term brooding.  And with general market uncertainties abounding—the beating of the North Korean war drum, add in Zuckerberg’s failed stock restructuring initiative and posturing for a 2020 presidential run—all the general optimism and rave-review fundamental analyses that surround this stock may not presage another big rally anytime soon.

I would invest in Facebook, but only as a solid long-term play.

Make it a part of what Warren Buffett and James Altucher would refer to as your “forever portfolio.” The recent political spotlight and the way Zuckerberg has handled it make me think that Facebook has become not just a national business phenomenon, but an important business citizen as well.

That’s a good thing for the long term.

Facebook will likely be a part of our lives, our news, our politics, and our purchasing for the next several generations.

In short, put your money elsewhere if you are looking to catch the next big wave of returns. But I’m not so contrarian that I would contradict the wisdom of the many and tell you that this stock is a bad long-term pick. It’s not. Put it in your IRA and check back in a few years.


DISCLOSURE: The author owns stock in Facebook Inc.

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This article is a part of our ongoing series that explores a different stock or fund each week. The information contained herein should not be construed as ‘financial advice’ and is presented as the opinion of the author.

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