Facebook: Are publication and privacy issues over?
For years, the classic “F.A.A.N.G.” stocks have been market leaders, not only is the tech-heavy NASDAQ, but in the broader S&P 500 index as well. F.A.A.N.G. stands for Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL) (which has been re-named, Alphabet, since this acronym was coined). Investors who’ve owned any of these stocks over the years have done quite well for themselves, with each and every one of the big-tech players producing significant alpha.
However, even the best of the best tech names got caught up in the recent NASDAQ 100 sell-off. Although we’ve witnessed a large rally thus far this year, when looking at the returns that these famous F.A.N.G. names have produced during the last month, we see that all 4 stocks have generated negative total returns. Facebook shares are down 2.56% during the last month. Amazon shares are down 6.97% during the same period. Netflix shares are down 10.48% during the prior month. And, Alphabet shares are down 2.41%.
When looking at the valuations that these stocks present, Facebook is the cheapest, by a fairly significant margin, when talking about a blended price-to-earnings ratio, as well as a forward looking P/E ratio. At Facebook’s current share price of $273.88, shares are trading with a 26.4x blended P/E ratio and a forward P/E ratio of 23.75x attached to them.
Facebook grew its bottom-line by 57% in 2020 and right now the consensus analyst estimates for 2021, 2022, and 2023 earnings-per-share growth are 14%, 16%, and 18%, respectively. It’s rare to see a mega-cap stock like Facebook (Facebook’s current market cap is $754 billion) produce such strong and reliable double digit bottom-line growth. And, in today’s relatively expensive market (the forward P/E ratio attached to the S&P 500 is currently 21.9x, which is well above its 5 and 10-year average P/E ratios of 17.7x and 15.8x, respectively) it’s even more rare to find relatively low PEG ratios attached to blue chip stocks.
When analysts look at Facebook’s 23.7x forward P/E ratio and compare it to the 15%+ consensus long-term growth rate, they put the stock into the “growth at a reasonable price” or “GARP” category. In her recent Gurufocus article, Sydnee Gatewood reported that investment management firm, Ruane Cunniff, had this to say about Facebook’s valuation when discussing their Q4 review of the company: “We believe this risk is reflected in the shares with Facebook trading for ~24x consensus forward earnings, a near market multiple for a dominant social media enterprise whose earnings we expect to grow far in excess of the overall economy for years to come.”
However, it hasn’t just been valuation on the minds of analysts. In the Ruane Cunniff report, the advisers said, “Not surprisingly, in a year that saw parts of the globe locked down for extended periods, engagement with the Facebook family of apps strengthened.” Regarding Facebook’s app strength and the company’s ability to compete, adapt, and evolve during volatile times in the markets, Anusuya Lahiri, a Bezinga staff writer with a 5-star rating by Nobias’s algorithm recently highlighted some of the company’s recent innovations as Facebook continues to hunt global market share.
She began with news that Facebook recently developed and launched its Instagram Lite product saying, “The app requires just 2MB compared to Instagram’s 30MB. It is compatible with 2G networks, permitting customers in India, Africa, Asia, and Latin America with older internet infrastructure to access the service.”
Instagram Lite still offers the app’s core processes, without TV banner ads and the sharing of video clips. Video ads are largely viewed as some of the most attractive, garnering the highest margins for digital ad platforms like Facebooks; however, this is a case of the company chasing previously unavailable market share, rather than prioritizing ARPU (average revenue per user).
Historically, Facebook’s ARPU figures have been quite low historically (especially relative to its U.S. and European numbers), so the launch of Instagram Lite isn’t likely to negative impact the company’s margins moving forward. Lahiri also highlighted other innovations targeting emerging markets, saying, “Additionally, Facebook in Tel Aviv also developed the Express WiFi service to extend internet access to around 20 countries in Africa, Asia, and South America.”
However, even with such strong growth in mind, the Ruane Cunniff report went on to note that, “While Facebook turned in strong financial performance in a difficult environment, 2020 was not without turmoil as political discourse raged on the company's apps.”
Facebook’s size and scale have attracted quite a bit of negative attention throughout the recent U.S. election season. And what’s more, the company’s privacy policy issues and ongoing disputes regarding internet legislation have put Facebook squarely in the crosshairs of regulators in the U.S. and abroad.
Several of Facebook’s frequent mentions by 4 and 5-star analysts and contributors tracked by the Nobias system focused on the company’s recent “aggressive content blackout” in Australia in response to changes that the country made to its digital content laws, which would have required Facebook to pay news publishers when their content was broadcasted on the Facebook platform.
In the days since the original blackout, Facebook has re-established media coverage in Australia. Motley Fool contributor, Anders Bylund, has covered the ongoing issue recently and said, “The local news sites that were disabled last week are back online as lawmakers agreed to make some changes to the proposed News Media Bargaining Code.”
Bylund continued, noting that the issue between the Australian code and Facebook came down to the fact that “As written, the law requires payments to news media outlets before a handpicked group of online services including Facebook and Google would be able to publish links to their news articles.” However, he said that Australia's code “is getting some tweaks to address Facebook's core concerns” which is what inspired Facebook to go back online in the country.
Facebook put out a statement, in which the company’s Vice President of Global News Partnerships, Campbell Brown, said, "Going forward, the government has clarified we will retain the ability to decide if news appears on Facebook so that we won't automatically be subject to a forced negotiation."
Giulia Bottaro of Proactive Investors reported that in the hours after its ban-reversal, “Facebook has signed a partnership with Australia’s largest media company.” Bottaro said, “The social media giant will host news provided by Seven West Media, which owns the prominent Seven Network, The West Australian, The Sunday Times and Seven Studios among others.” She also reported that Seven West Media recently signed a deal with Alphabet, as well.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
While it’s good news that Facebook and Australia were able to come to an agreement, it’s clear that ongoing publication and privacy issues are far from over for Facebook.
The company recently released a television commercial which highlighted all of the incredible changes that have occured with the internet since its launch, while noting that internet regulations in the U.S. have not changed during the last 25 years since the Telecommunications Act was originally passed in February of 1996.
As we continue to forge into the digital age, there is no doubt that ongoing internet regulation is necessary. Facebook says as much, highlighting the fact that it is on board with an up-to-date set of rules for digital media platforms. There is no telling how quickly major reform like this will pass in the U.S. and abroad; yet, the Australian narrative points towards there being significant growing pains along the way.
Generally speaking, the stock market hates uncertainty. And, with a myriad of potential outcomes at play with regard to regulating digital media platforms, Facebook’s relative discount to its F.A.A.N.G. makes sense. Until these issues are resolved, it appears likely that broad investor sentiment surrounding Facebook will be tepid, at best.
These uncertainties make themselves clear when tracking the 4 and 5-star Nobias analysts as well. Out of the 24 opinions that we track, we see 10 buy ratings, 2 neutral ratings, and 12 sell ratings, showing that Facebook remains a battleground stock.
Disclosure: Nicholas Ward is long AMZN, FB, and GOOGL. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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