Is Facebook Stock Overvalued?

Facebook, Inc (NASDAQ:FB) is the preferred social media platform of Generation X and Boomers around the world.

The namesake social network itself has over 2.7 billion monthly active users. Its closest competitors are YouTube, WhatsApp, Facebook Messenger, WeChat, and Instagram, all with over one billion users a piece, and all but YouTube owned by Facebook.

It seems like it owns everything these days, so is Facebook stock overvalued?

Facebook Vs FTC

Co-founder and CEO Mark Zuckerberg is facing a possible antitrust suit from the FTC, and it’s not even close to his first time in regulatory hot water.

If anything, Facebook evolved from an obscure college “hot or not” site to the most controversial technology on the planet.

It has been blamed for everything from violating the privacy of every day users to shifting elections through misinformation campaigns.

Facebook made billionaires out of eight people (including Peter Thiel, Mark Pincus, and Yuri Milner), and it’s pushing its ecosystem to compete with marketplaces like Craigslist and eBay, payment services like PayPal and Square, and even identity verification services.

Let’s dive into this ubiquitous company to see if today’s investors will be so lucky as the initial team.

Why Facebook Stock Went Up

Between the coronavirus and the U.S. presidential elections, Facebook is the place to be in 2020.

The platform upgraded to include streaming and profited from Microsoft’s investment and subsequent shutdown of Mixer to compete with Twitch and YouTube.

Livestreaming is also increasingly popular on both Instagram and Facebook, as rappers Tory Lanez and Tekashi 6ix9ine set livestream records on IG Live during the pandemic.

The buzz helped Facebook become a legitimate competitor to Google’s dominance in online ad revenue. This is despite a massive advertising boycott joined by over 1,000 companies, some with major brand power, like Samsung, Walmart, Geico, and Procter & Gamble.

It turned out not to matter at all, as small businesses happily flooded the network with ads to take market share from larger competitors.

No matter who steps into the ring with Facebook, it seems to come out on top. Although the intensity of congressional inquiries against big tech companies – like the entire FAANG index, sans Netflix – may prove to be the one battle Facebook can’t overcome.

Facebook Financials Are Astonishingly Good

Facebook’s Q2 2020 earnings were $5.2 billion off $18.7 billion in total revenue. This gives the company a 27.7 percent net profit margin.

Almost half of this revenue comes directly from the U.S. and Canada, with 56 percent coming from the rest of the globe.

Despite the boycotts, Facebook’s revenue grew 10.7 percent as the world settled into its platform for free, ad-supported entertainment and informational content.

Year-over-year revenue grew 27.5 percent versus the same period in 2019, while net income grew 97.9 percent. It would appear that even though marketing budgets were cut, Facebook is a large enough market to handle the hit better than traditional media companies like Gannett, which still has yet to recover from COVID-19.

Still, 98 percent of Facebook’s revenue is dependent on advertising, and that makes it vulnerable moving forward.

That’s just one of many reasons some analysts believe Facebook may be valued too high. Let’s talk about a few.

Is Facebook Valuation Too High?

Facebook has a market cap around $750 billion in the fourth quarter of 2020. This is based on FB common stock shares trading in the $250-300 range.

This is a long way from the $38-per-share IPO in May 2012, approaching 10x growth. It’s also about a 10x multiplier on the company’s $70.697 billion revenue in 2019, which doesn’t account for the 34 percent operating margins.

There are a lot of valid questions about the growth potential of Facebook, especially when it’s facing possible antitrust action from the FTC for owning too many social media platforms that account for too much of the market.

There’s a possibility Facebook will be broken up in the same way Bell System of landline telephones was broken into Baby Bells. before morphing back into AT&T and Verizon as we know them today.

Facebook is also a leader in other potential growth areas though. Its Portal video screens and Oculus VR headsets are growing in their respective niches and expanding the company’s reach into consumers’ homes. It’s unclear if this 2 percent of revenue can grow enough to account for potential losses from regulation.

Will Facebook Stock Drop?

Although it recovered well from the coronavirus pandemic, Facebook underperformed compared to the broader market on the back of its FTC antitrust probe.

The company became the mascot for election rigging, fake news, and toxic political bickering between neighbors. It’s unclear if its tarnished reputation can overcome and continue plugging, and it doesn’t just stop at politics and privacy issues.

Facebook’s 2.7 billion people represents nearly 60 percent of the 4.57 billion worldwide internet users. Those who are avoiding it tend to be younger generations who don’t want to hang out in the same online forums as their parents and grandparents.

Platforms like TikTok, Telegram, Signal, and Snapchat are more popular with younger generations who are more conscious about what they put online.

There are rocky waters ahead for the company, and the government’s antitrust probe is just the tip of the iceberg. When neither the government nor the populace trusts it, Facebook risks losing advertisers back to Google, Apple, and other competitors.

Is Facebook Stock Overvalued? The Bottom Line

Facebook is the F in FAANG and one of the biggest success stories of the 2000s. This upstart social media network displaced MySpace into obscurity and remains relevant in the face of dozens of competing networks (which it has no problem buying).

Things aren’t all fun and games though, as the company faces regulatory scrutiny for a series of privacy and misinformation concerns.

While Facebook is riding high, it’s no longer outperforming the general market, and there’s uncertainty surrounding its ability to continue raking in advertising money while expanding its profitability in consumer electronics. If the Oculus Quest 2 is a hit with gamers this holiday season, it could build the buzz it needs heading into an unstable economy in 2021.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.