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Congressional Hearings Likely Harden the Battle Lines Over Facebook, Inc. Stock

Vince Martin

In a mega-cap tech group full of interesting debates, Facebook, Inc. (NASDAQ:FB) has one of the more intriguing bull/bear arguments.

To bulls, FB stock is absurdly cheap, with the current political drama a short-lived sideshow. To bears, Facebook stock has peaked, CEO Mark Zuckerberg is over his head, and the combination of user anger and regulatory scrutiny will send profits tumbling.

Within that argument are so many unanswered questions. Even more arose after Zuckerberg’s appearance in front of Congress on Tuesday. Will Facebook ever charge for its services? Is the company really a monopoly? Are users defecting or going to defect? Has Facebook grown to the point where Mark Zuckerberg — long criticized for his immaturity — finally can’t manage it alone?

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I’d been a bull on FB stock up until the end of last year. Amid the current drama, I’ve stepped to the sidelines. Both bulls and bears have their points when it comes to Facebook stock. And particularly after the news of this week — and the past few — I’m not sure I see an edge in taking either side just yet.

The Bulls Win on Tuesday

Mark Zuckerberg appears to have done enough on Tuesday to keep Facebook stock afloat, at least for now. With some help from a strong day for the market as a whole, FB stock gained 4.5% that day, with 2 points of the gains coming after the hearing began.

The takeaway from bulls is that Facebook is set up for a future where regulation increases but still is manageable. Zuckerberg came off as cool and collected and avoided any major gaffes, and as his testimony continued on Wednesday, he even admitted that the government had a role in the social media space:

“The Internet is growing in importance around the world in people’s lives and I think it is inevitable that there will need to be some regulation. So my position is not that there should be no regulation — but I also think you have to be careful about regulation you put in place.”

It’s a smart angle for Facebook to take. Regulation itself isn’t a bad thing. It could restore confidence among users, who are going to be the final arbiter of this controversy, and who I’ve argued are going to be the only thing that matters for Facebook stock. And as Zuckerberg himself noted, regulation “might be more difficult for a smaller startup to comply with.”

There’s a faint parallel here to Altria Group Inc (NYSE:MO), the most successful stock of all time. The landmark tobacco settlement in the 1990s was supposed to hurt cigarette companies. But its ban on marketing simply froze the brands, leaving Marlboro as the category leader and letting Altria stock continue to soar.


In a way, regulation even could support Facebook’s competitive position, by raising barriers to entry for any potential rivals.

FB Stock Bears Aren’t Going Away

All that said, I’m not sure I’d go whistling a happy tune just yet. There’s still a lot of political animosity toward Facebook worldwide. In the key U.S. market, the left is angry that Facebook (in whatever way) appears to have aided the Trump campaign. The right is convinced — as Senator Ted Cruz (R-TX) brought up in the hearing — that Facebook is censoring conservative news and opinion.

European regulators are more active and more of a threat. The GDPR (General Data Protection Regulation) comes into effect next month, and the EU already has fined Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) under different standards.

More broadly, it’s hard to see Congressional hearings as a positive for any stock. Facebook is dominating the news — and not in a good way. Many users likely still are processing the implications of what they are learning. And there is an opening here for a rival to be the “better” Facebook.

Interestingly, Facebook appeared to raise the possibility of a pay-to-use model. That’s probably not a good thing, however. U.S. and Canada ARPU (average revenue per user) is at a run rate over $100 per year, according to the Facebook 10-K. Could Facebook really charge $10 per month to its U.S. users? A Netflix, Inc. (NASDAQ:NFLX) subscription is $13.99.

Mark Zuckerberg so far has avoided any major errors. That’s not the same thing as a win, however. The concerns surrounding FB stock haven’t changed all that much this week.

What to Do With Facebook Stock

From here, FB stock still looks like a “feel” play. Its performance over the next few years will come down to whether users truly leave the service or not. And it’s very much a binary case. The “network effect” that built Facebook can dismantle it as well.

There’s one concern to note on that front. Overshadowed by the Congressional hearings was Piper Jaffray’s bi-annual survey of teenagers. And it showed that Snap Inc (NYSE:SNAP) platform Snapchat continues to outperform Facebook and Twitter Inc (NYSE:TWTR) in that demographic. Is that just a single-generation issue? Or is the tip of the iceberg? Time will tell.

As of this writing, Vince Martin has no positions in any securities mentioned.

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