External stressors like the U.S.-China trade war have a funny way of impacting the investment markets. Prior to the heightened tensions, social-media giant Facebook (NASDAQ:FB) was on a roll, clawing back its losses from last year. However, the bears have questioned FB stock, primarily due to the many controversies facing the underlying company.
But now those doubts go out the window. Or, more accurately, they’re still there, but investor focus has completely shifted. Amid jittery trading in the broader markets — such as the S&P 500 index’s 6.6% loss during May — Facebook stock offers a reassuring take for concerned investors.
The reason? It’s so simple I almost hate to bring it up: FB stock has no exposure to China.
That’s not to say of course that the Asian juggernaut is inconsequential. China levers the world’s second-biggest economy. A lot of “socializing” occurs in the country, given its nearly 1.4 billion population size. If China opens its digital doors, Facebook stock, along with rivals Twitter (NYSE:TWTR) and Snap (NYSE:SNAP) will likely enjoy a new renaissance in social media.
But that’s not going to happen, at least not anytime soon. A couple years ago, a Twitter insider revealed that it had 10 million active Chinese users surreptitiously using the platform. However, that figure is essentially meaningless when the communist party frequently cracks down on social media.
Usually, a door closing indefinitely would hurt a company’s expansion prospects, but not FB stock. Shares will likely return to previous record highs near $220, 25% above current levels. Not only that, over the long run, I expect the company to decisively hit new plateaus, China or no China. Here’s why:
FB Stock Cleared Itself of Rational Headwinds
As you’ll recall, the FB stock price shot up to record highs in late July of last year. However, a “poor” showing for its second quarter of 2018 earnings report clawed back those gains.
But just how disappointing were the results? On paper, the performance was mixed, with the company beating earnings per share expectations but fell short against revenue. Also, daily active users slipped slightly against the consensus forecast.
At the time, I argued that this mixed disclosure didn’t justify the hemorrhaging in the Facebook stock price. What many bearish analysts failed to understand was basic math: due to the law of large numbers, it’s incredibly difficult for a large organization to move the needle.
Yet they did move the needle noticeably, and did it during the first round of the trade war.
Now let’s address the other headwind against Facebook stock: the underlying company’s many controversies. Admittedly, some of the politically tinged scandals did no favors for Facebook’s image. Neither did its privacy violations, which negatively impact all demographics.
To their credit, management has worked overtime to restore their brand reputation and earn public goodwill. They’ve even made moves that market observers may consider detrimental to business. Nevertheless, despite internal strife within the executive ranks, FB is pressing on with their new vision.
And what great time to roll that vision out. According to the Pew Research Center, rising trade tensions have resulted in Americans viewing China less favorably. Extrapolate this logic out, and Americans today will probably regard China as an adversary.
Finally, this dynamic puts Facebook and the American public on the same page. Last year, management stated that FB will only do business with China if they drop censorship of free speech. Now, Facebook can deliver that same message organically.
Facebook Stock to $220 and Beyond
If you look at the charts for certain investments such as big banks, you’ll notice a correlation with headlines and equity pricing. In the case of FB stock, you have somewhat of an inverse relationship.
For instance, the first volleys in the trade dispute started in early 2018. But prior to the Q2 2018 earnings report, the FB stock price was up more than 22% for the year. Back then, the discussion was the same: an unreasonable Trump administration won’t see eye-to-eye with their Chinese counterparts.
Currently, we’re back to square one. China is mad, Trump tweets like a madman, and investors are scrambling for cover. It’s an ideal situation for Facebook stock because shares again don’t have exposure to China. In other words, shares have already proven the case that they can move to $220 in near-identical circumstances.
But here’s the thing: FB is actually in a much better position than it was last year. This time, management can drive home the point that Facebook is pro-democracy and pro-free speech. Clearly, that image is very important to them, and the trade war gave them the gift of credibility.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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