Never far from the gaze of antitrust, Facebook has faced a slew of legal battles over the past few years, so is it now time for investors to drop this stock?
Oct. 28, 2020
Facebook (NASDAQ: FB) is bracing for more antitrust action as it prepares to defend its right to maintain both Instagram and Whatsapp as conjoined businesses in the midst of an attempted government break-up of the three. Facebook is no stranger to antitrust as just last year it was made to pay a record $5 billion fine for the Cambridge Analytica scandal, whereby millions of people’s personal data was leaked and used for targeted political campaigns.
With accusations of shady practices, Facebook seems more like something out of a dystopian novel rather than an everyday company that we ‘follow’. We ask if Investors should drop this FAANG stock, or if it is worth hanging on to their investments?
Facebook’s performance has been quite good despite its legal battles, with its stock currently up 35% YTD. In Q1 it experienced its slowest quarterly growth since going public, this was due to a global digital advertising slowdown in the early days of COVID-19. In Q2, however, advertising revenue started growing again and its total revenue grew 11% year-over-year (YOY) to $18.7 billion, beating expectations. In its earnings for Q3, Facebook is estimated to report a 5% increase in revenue to $19.8 billion as well as $1.94 earnings per share, which, if proven to be accurate, will be up 7% from the previous quarter.
Coming up to the presidential election, Facebook has decided to forego normal business procedures and instead is keeping tools at hand such as those used in unstable countries, whereby the algorithm attempts to prevent civil unrest from being displayed on users’ home feed. In addition, Facebook will be providing a ‘Voter Information Center’ tab that will give live, official election results as provided by Reuters. All this might sound great, but after 2016, it is a deliberate and concentrated effort to prove that the company is no longer interfering in political democratic processes.
It will be interesting to see how well Facebook can handle this especially polarized election and in particular if this will affect its stock after the Q3 report on the 29th of October.
Looking towards the future and a decision to revise Article 230 could become a problem for Facebook. Article 230 currently protects social media and internet companies from liability for anything that users might post. Social media companies are then expected to work with ‘good faith’ and remove harmful content as they see fit. It is these protections that have helped giants such as Facebook, Twitter, and Youtube to become the platforms that we know today.
Many politicians believe that Article 230 needs to be revised and social media giants to be held more accountable. In contrast, accountability could seriously damage social media as a whole and Facebook would have to revise many of its business policies.
If Article 230 is revised, Google (because of Youtube) and Facebook would be the two FAANG stocks that this would affect. However, Google has many different areas of business and will likely recover well enough, whilst Facebook has social media as its overarching focus and will take more of a hit opening it up to more legal problems in the future.
FAANG or AANG?
Facebook has long been a bastion of Big Tech, yet, for many, it is no longer a company that they would choose to invest in, at least for the long-term. In a survey carried out by Business Insider only about 2% of millennials would choose Facebook as the FAANG stock to buy and hold for 10 years. Amazon on the other hand gained 51% of that choice.
As it is no longer a top choice for the millennial generation of investors and it has proven itself to be untrustworthy, perhaps analysts should consider removing Facebook from the popular FAANG acronym given to the 5 top tech stocks. However, as the company continues to perform well under recent legal and pandemic related circumstances, it continues to show strength despite it all.
This does not mean that investors should drop Facebook as a stock in their portfolio, but rather, be wary and keep an eye on its legal battles and the resulting actions taken after each one. Facebook is too big to fail completely, but it is a company that one cannot trust to keep its nose clean and will always be a worry on your mind.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.