Just when it looked like digital advertising giant Facebook (NASDAQ: FB ) was bucking the trend of negative headlines and Facebook stock was finding some upward momentum, yet another few shoes dropped in the company's multi-month data-privacy scandal.
Namely, the District of Columbia sued FB over the way the company handled the Cambridge Analytic a data breach. That happened on the same day that the New York Times ran a scathing article on Facebook which detailed how the company had given large tech companies access to users' personal data.
None of that is good news. Consequently, the mini-rally of Facebook stock ended abruptly. Facebook stock plunged to levels not seen since January 2017, although the shares have jumped today.
It is easy to look at Facebook stock, call the whole situation "doom and gloom" and sell the shares. That's the easy thing to do. That's exactly what the Street has been doing for the past six months and continues to do today. Regardless of how cheap the stock gets or how far it falls, each new negative headline regarding data privacy breaches makes investors want to sell Facebook stock more.
Thus, until these negative headlines stop rolling in, it's nearly impossible to say with conviction that Facebook stock has bottomed. But it's easy to say this with conviction: the selloff of Facebook stock that occurred in the second half of 2018 is way overdone.
At the end of the day, only three groups matter for Facebook: users, advertisers, and regulators. Users and advertisers aren't quitting the FB ecosystem. Regulators can't do much to hurt Facebook's business.
Over the long-term, the bulls will be right about Facebook stock. No one really knows when this sinking ship will turn around. But it will inevitably turn around at some point. When it does, Facebook stock will stage a huge rally.
Users Aren't Pulling Away
The most important factor that determines Facebook's long-term value is the number of users on Facebook's ecosystem. As long as the Facebook ecosystem has billions of digital users, Facebook stock will have a bright future.
At this point in time, there is little evidence indicating that Facebook's recent negative press has had an adverse impact on its user base. Facebook's daily active user base is still growing, and while it's plateauing in North America and Europe, that plateauing growth problem predates the data privacy problems and is more a function of saturation than anything else.
Also, Instagram remains the hottest social media app in the world, while Messenger and WhatsApp are the two most-used messaging apps in the world. Indeed, among the apps available on Google (NASDAQ: GOOG ) and Apple's (NASDAQ: AAPL ) app store, Facebook's four digital properties (Facebook, Instagram, WhatsApp, and Messenger) are still among the four most-downloaded social media and communication apps.
Overall, despite the negative press, users aren't abandoning the Facebook ecosystem. Why? Because consumers are addicted to the internet, and Facebook's digital properties, alongside some properties from Google and Netflix (NASDAQ: NFLX ), are the most engaging and fun ways to spend time on the internet.
Advertisers Aren't Leaving
The second-most important (and arguably the most important) factor that determines the long-term value of Facebook stock is the number of marketers who want to advertise on the website. As long as FB has millions of advertisers pumping billions of dollars into the Facebook ecosystem, Facebook will be an extremely valuable company with a bright future.
As on the user front, there is little evidence at this point to suggest that negative press is causing an advertiser exodus. Following the scathing New York Times report, digital marketing publication MarketingLand spoke to three major marketing agencies about ad trends on Facebook. The main takeaway was that performance trumps negative press. Facebook's ads are still performing at industry- leading levels. Thus, negative press has had zero effect on Facebook's ad revenue.
According to Marty Weintraub, the founder of digital agency Aimclear , his clients care more about "performance marketing results than political and legal kerfuffle." Moreover, the number of ads that Weintraub's clients are buying on Facebook has actually increased recently, he reported.
Michelle Morgan, Clix Marketing's director of client services, reiterated that ad performance is the most important criteria for marketers. Because the performance of Facebook's ads has held steady, so have advertisers, she stated. Finally, Justin Freid of CMI Media reported that brands continue to have a positive outlook on the advertising platform, adding that it doesn't look like things will go south on that front anytime soon.
Overall, despite the negative press, advertisers aren't pulling out of the Facebook ecosystem because brands don't care about politics and data privacy. They care about performance and engagement, and Facebook is still performing well in both areas.
Regulators Won't Damage Facebook's Business Over the Long-Term
The biggest real concern for owners of Facebook stock is regulation. Specifically, the Street is clearly concerned that Facebook is going to get slapped with several multi-billion dollar fines. The Street is also concerned about FB potentially having to pay higher taxes, and the possibility of legislators restricting Facebook's data usage, thereby limiting the performance of the platform's targeted ads.
The fines are one-time events. Google has been hit with fines before, and its business has easily survived them. The taxes won't be that high, and they are already fully priced into Facebook stock. Taxes also won't threaten the viability of Facebook's business model or the longer-term outlook of Facebook stock.
The big risk is legislation which could hamper the performance of Facebook's targeted ads. But such legislation would hurt the whole digital-ad space. If Facebook can't use certain personal data for ads, neither can Google, Snap (NYSE: SNAP ), or Twitter (NYSE: TWTR ). Thus, everyone will be on the same playing field, and Facebook will still be a better advertising platform than its digital peers. The whole digital-ad playing field will just be less profitable than it is today.
But that isn't a problem. Targeted digital advertising is the future because digital is where consumers' eyeballs are and targeting delivers strong results. Thus, there is nowhere else for brands to put their ad dollars besides targeted digital advertising, so regulators can't really do much to derail Facebook's business model.
The Bottom Line on Facebook Stock
Facebook's press is bad and only getting worse. But users and advertisers aren't abandoning its ecosystem.
Regulators can't limit the company's business in the long-run, so, although there's a bunch of near-term noise, Facebook remains an extremely valuable company with a bright future.
Facebook stock now trades with a forward price-earnings ratio of just 17. That is just two percentage points above the market's average forward multiple of 15.
But the market's sales grew by just a hair over 10% last quarter, while Facebook's sales surged 30%-plus. Clearly, the company's bright future is not being priced into Facebook stock at all, creating an opportunity for long-term investors.
As of this writing, Luke Lango was long FB, GOOG, NFLX, and TWTR.
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